Indian rupee may benefit if US Fed opts for 50 BPs interest rate cut

The Indian rupee could benefit in the likely scenario that the United States Federal Reserve opts for an interest rate cut of 50 basis points (BPs) over the week. The US Fed, led by Chair Jerome Powell, is expected to begin the rate cut cycle on Wednesday, although it is not confirmed yet if the Fed will cut rates by 50 or 25 BPs.

The rupee, which ended 83.8875 in the previous session, is set to open flat-to-slightly-higher to the US dollar if the one-month non-deliverable forward is an indication, according to a Reuters report on Monday, which noted that the rupee has been locked in the 2-paisa range over a month. Overall, the unpredictability in the nature of the rate cut adds volatility to world markets in general this week, the report added.

Speculations over how much US Fed will cut rates

The US non-farm payrolls data, which measures change in number of employees in the previous month across sectors excluding farming, and a moderating inflation initially saw many in the market speculate against a 50 BPs cut. Subsequent reports in the press, however, indicated that Fed officials were considering a 50-BPs cut. According to an HSBC Bank note, the US dollar is likely to recover if the Fed decides to take a cautious course while deciding the rate of the cut.

Among indicators that the Indian rupee stands to benefit with the US rate cut is new data from India’s National Securities Depository Limited (NSDL).

How India may be impacted

Indian shares worth a net $949.2 million were purchased by foreign investors on September 12, new data from NSDL said. On the same day, foreign investors sold Indian bonds worth a net $71.4 million, the data added.

Other indicators that Reuters used to analyse the impending rate cut on the rupee were the “one-month non-deliverable rupee forward at 83.96” and an “onshore one-month forward premium at 9 paise”, besides the facts that the dollar index was “down at 100.97” and Brent crude futures “up 0.2% at $71.7 per barrel”. The Ten-year US note yield is “at 3.66%”.

This will be the first interest rate cut to be announced by the US Fed in more than four years, and it comes barely two months ahead of the United States presidential elections scheduled in November this year.