Indian Rupee Under Pressure: US Interest Rates Affect Exchange Rate

At the beginning of the week, the Indian rupee is under pressure again as U.S. Treasury yields continue to rise. This dynamic suggests that the rupee may open weaker against the U.S. dollar on Monday after a slight recovery at the end of last week. The 1-month non-deliverable forward contracts indicate an expected exchange rate of 84.82-84.83 against the dollar, compared to a closing rate of 84.7875. Last Friday, the Indian currency gained 0.1%, which traders attributed to dollar sales by the central bank and potential inflows. A foreign exchange trader from a bank noted that the rupee's recovery can be described as 'respectable' given the ongoing pressure. Nevertheless, this recovery is challenged by the persistent strength of the dollar. Other Asian currencies are also starting the week defensively as rising U.S. yields put pressure on them. In particular, the 10-year U.S. yield rose by seven basis points on Friday and by 25 basis points over the week. Analysts suggest that inflationary pressure and the U.S. deficit, due to the policies of incoming U.S. President Donald Trump, could weaken the demand for Treasuries. The focus of the week is the Federal Reserve meeting on Wednesday. Although a rate cut of 25 basis points is already priced in, investors will be eager to see the outlook for the coming year. According to a statement from ING Bank, inflation remains high, and with Trump's efforts to stimulate U.S. growth, the Fed will signal a more cautious easing policy for 2025. Only three rate cuts are expected instead of the previously speculated four. Meanwhile, India's foreign exchange reserves have fallen to multi-month lows as the central bank intervenes in the market to support the rupee. These interventions are challenged by national and global headwinds.