Rupee battles persistent dollar demand in face of dovish Fed outlook

The Indian rupee is expected to open little changed on Thursday as persistent dollar demand countered increasing confidence that the U.S. Federal Reserve will cut rates in the second quarter of next year. Non-deliverable forwards indicate the rupee will open nearly unchanged from 83.3250 in the previous session.

The rupee has not participated in the dollar's broad decline this month. The dollar index is down 3.6 per cent this month, while the USD/INR is slightly higher.

The rupee's "absolute lack of acknowledgement" to the changing dollar and the U.S. interest rate outlook is "confounding to say the least", an FX trader at a bank said.

"Obviously, there is persistent dollar demand and then you have the absolute lack of interest."

It was a relatively quiet day for Asian currencies on the last day of what has been a good month. The build-up in expectations that the Fed will deliver rate cuts in 2024 has pushed down U.S. Treasury yields and boosted Asian currencies.

The 10-year U.S. Treasury yield has slumped 60 basis points (bps) in November and the two-year yield, which is Fed-outlook sensitive, is down more than 40 bps.

Comments by Fed officials this week have prompted a further dovish recalibration of market expectations around rate cuts. Fed Governor Christopher Waller, a hawk, flagged a possible pivot ahead, prompting investors to fully price in a 25 bps rate cut in May next year.

DBS said investors fully pricing in rate cuts by May was "a tad more aggressive" relative to their expectations that the first rate cut will be delivered in June. It expects a total of 100 bps of rate cuts in 2024.

U.S. initial jobless claims data due later in the day will provide cues on the labour market, an important cue in the debate on rate cuts.

KEY INDICATORS:

One-month non-deliverable rupee forward at 83.3850; onshore one-month forward premium at 4.75 paisa

Dollar index down at 102.76

Brent crude futures down 0.1 per cent at $83 per barrel

Ten-year U.S. note yield at 4.27 per cent

As per NSDL data, foreign investors bought a net $214.2mln worth of Indian shares on November 28

NSDL data shows foreign investors bought a net $52.8mln worth of Indian bonds on November 28