The weakness comes after the US Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday (September 16), its first rate increase since 2023. The Fed also signalled the possibility of another hike this year, strengthening the dollar and adding to pressure on emerging-market currencies.
The dollar index moved above 100 after the Fed decision, touching its highest level in more than a month. Asian currencies also weakened on Thursday (September 17) as markets assessed the prospect of higher global borrowing costs.
Why is the rupee under pressure?
The rupee has been weakening for seven straight sessions.
The latest pressure comes from a combination of a stronger dollar, elevated crude oil prices and foreign fund outflows from Indian markets.
Higher crude prices are particularly important for the rupee because India imports a large share of its crude oil requirement. Costlier oil increases demand for dollars from importers, putting pressure on the domestic currency.
Brent crude was around $107.51 a barrel on Wednesday (September 16), remaining elevated amid tensions in West Asia.
Foreign portfolio outflows are another pressure point. Foreign institutional investors sold Indian equities worth ₹2,032.61 crore on a net basis on Wednesday, according to exchange data.
What does the Fed hike mean for the rupee?
The Fed’s 25-basis-point rate increase makes US assets relatively more attractive by raising dollar yields. If US interest rates remain higher for longer, some global investors may prefer dollar-denominated assets, potentially increasing demand for the US currency.
Markets are also pricing in the possibility of another Fed rate increase. Futures currently imply roughly a 50% chance of another hike next month, according to the information available on Thursday.
J P Morgan Asset Management APAC chief market strategist Tai Hui said persistent inflation pressures could require the Fed to continue tightening monetary policy.
For the rupee, the key issue is therefore not just Wednesday’s rate hike but the path of US interest rates and the dollar’s direction from here.
What could support the rupee?
Domestic factors could provide some cushion. Traders expect dollar inflows linked to the IPO of the National Stock Exchange (NSE), which opened for subscription on Thursday (September 17) after allocating shares worth $703 million to anchor investors on Wednesday (September 16).
Intervention by the Reserve Bank of India could also help limit sharp movements in the currency.
However, traders said sustained trading above ₹96 could worsen sentiment around the rupee.
On Wednesday, Mirae Asset Sharekhan research analyst Anuj Choudhary said the rupee was being pressured by a stronger dollar, elevated crude prices and rising US Treasury yields, although positive domestic equities provided some support. He had estimated the USD-INR spot range at ₹95.75-₹96.20.
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Rupee at ₹96: What does it mean?
The move above ₹96 does not mean the rupee has suddenly collapsed. Thursday’s opening move from ₹95.96 to ₹95.99 represents a weakening of just 3 paise, or roughly 0.03%.
But the ₹96 level is significant as a market reference point because the rupee has not traded above it since July 27. A sustained move above the level would indicate that the recent pressure on the currency is continuing.
-With Reuters inputs
