The Indian rupee surged against the US dollar while the 10-year government bond yields dropped on Thursday after a dovish US Federal Reserve outcome raised hopes of more interest rate cuts next year.
The rupee opened 13 paise higher at 83.27 a dollar as compared to previous close of 83.40. The 7.18%, 2033 10-year G-Sec yield opened at 7.21%, down from Wednesday’s close of 7.26%
The US dollar index, which measures the greenback against a basket of currencies, fell 0.34% to 102.52.
The yield on 10-year US Treasuries fell below 4% for the first time since August as the Treasury market saw its biggest one-day rally on Wednesday. The 10-year yield traded at 3.998%.
The US dollar and the treasuries yields declined after the Fed signaled that the interest-rate hike cycle has come to an end while forecasting lower borrowing costs in 2024.
Read here: US Federal Reserve policy: Here are 10 key updates from the FOMC meeting outcome
The US Fed Chair Jerome Powell-led Federal Open Market Committee (FOMC) kept the benchmark lending rate unchanged for a third time in a row in the range of 5.25% to 5.50% and signaled that the interest rate hike cycle is over.
It also cut the median projection for interest rates at the end of 2024 to the midpoint between 4.50% and 4.75%, signaling they now expect 75 basis points (bps) of cuts from the current levels next year.
“Market pricing for near-term cuts has moved up materially post FOMC, with markets frontloading rate cuts into early 2024. We do not necessarily agree with the current aggressive pricing. However, if “totality” of data continues to cool and support their narrative, we think the Fed could fairly soon start laying the groundwork for normalization to begin early 2H24,” said Madhavi Arora, Lead – Economist, Emkay Global Financial Services.
A surge in domestic equity markets amid inflows from foreign institutional investors (FII) helped gains in the local currency. The slump in the US treasury yields is expected to trigger large capital flows to India.
Moreover, lower crude oil prices, with the Brent oil trading below $75 a barrel also supported the upside in the rupee.
“The rupee’s expected surge against the weakening dollar is influenced by the Federal Reserve’s decision to maintain interest rates and indications of potential easing in 2024. The cautious stance of Fed Chair Jerome Powell and the anticipation of lower borrowing costs have created a favorable environment for emerging market currencies, with the rupee positioned to benefit,” said Ajay Kedia, Director, Kedia Advisory.
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Kedia expects the rupee to trade in a range of 82.90 – 83.00 going ahead given that the uncertainty around elections seems to be fading away.
“However, a close above 83.50 could lead the local currency to 83.90 level against the greenback,” Kedia said.
The Indian government bond yields dropped tracking a slump in the US Treasury yields. Expectations of lower borrowing costs helped gains in the treasury markets leading to a fall in bond yields.
“The substantial dovish tone of the US Fed has surprised the markets. The Reserve Bank of India (RBI) also kept the interest rates unchanged last week and is likely to maintain the status quo going ahead, which will further ease bond yields,” Kedia said.
He expects the 10-year Indian government bond yields to trade around 7.2%.
Also Read: Nifty, Sensex open at record highs after US Federal Reserve keeps interest rates unchanged and indicates 3 rate cuts
“The crash in the US 10-year yield to 4 per cent will trigger large capital flows to India,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
On Wednesday, the Foreign institutional investors (FIIs) net bought Indian shares worth ₹4,710.86 crore, while Domestic Institutional Investors (DIIs) net sold shares to the tune of ₹958.49 crore, as per provisional data available on the exchanges.
Meanwhile, a dovish Fed lifted the Indian stock market as the benchmark indices hit their record highs on Thursday.
The Sensex was trading 837.21 points, or 1.20%, higher at 70,421.81, while the Nifty 50 surged 230.05 points, or 1.1%, to 21,156.40.
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