The Indian Rupee is expected to continue its downward trajectory against the US Dollar on Tuesday, following a significant decline last week when the USD/INR pair surged 1.1% to near 95.55 [1]. This movement comes after Indian financial markets were closed on Monday for Ganesh Chaturthi celebrations [1]. The sharp depreciation of the Rupee last week was attributed to a notable increase in US Treasury Yields, driven by heightened hawkish expectations from the Federal Reserve after the release of a hotter-than-expected US Producer Price Index (PPI) report for August, as well as persistently rising oil prices [1].
Higher US bond yields have reduced the attractiveness of risk-sensitive currencies like the Indian Rupee, especially for economies heavily reliant on oil imports such as India [1]. As of the latest update, 10-year US Treasury Yields are trading close to fresh highs of 4.99%, a level not seen since November 2023 [1]. Fears of a Federal Reserve rate hike of 25 basis points to a target range of 3.75%-4.75% at the upcoming monetary policy announcement on Wednesday have further fueled the rally in yields [1]. Strategists at Brown Brothers Harriman (BBH) anticipate the FOMC will break its streak of five consecutive holds, with a 25bps hike expected, justified by persistently above-target US inflation and a stable labor market. Fed funds futures are pricing in roughly 90% odds of a hike this week [1].
On the commodity front, Brent crude prices have extended gains amid escalating supply risks in the Middle East. Deutsche Bank analysts attribute the latest move in Brent to the precautionary shutdown of a major Saudi pipeline following recent attacks, and the postponement of a planned meeting between Iran and other Gulf states regarding the creation of a temporary shipping corridor through the Strait of Hormuz. These developments have heightened market concerns about regional supply security and key shipping routes [1].
The Indian Rupee remains highly sensitive to external factors such as crude oil prices, the value of the US Dollar, and foreign investment flows. Direct intervention by the Reserve Bank of India (RBI) in FX markets is also influential, though no specific intervention was mentioned in the article [1].
CONCLUSION
The Indian Rupee is under significant pressure due to surging US Treasury Yields and rising oil prices, with market expectations leaning heavily toward a Federal Reserve rate hike this week. Regional supply risks in the Middle East are further supporting higher oil prices, compounding the Rupee's vulnerability. Market participants should brace for continued volatility in the USD/INR pair as these external factors persist.