Rupee gains vs dollar as weak US GDP data softens Fed rate hike view

Dollar index falls as a contraction in US GDP eases Fed hike fears

The rupee on Friday registered its biggest single-day gain since October 20 last year, as a poor US GDP reading led to anticipation of the Federal Reserve slowing down the pace of its rate hikes.

The domestic currency settled at 79.27 versus the dollar on Friday, against 79.76 on Thursday. In the course of the day, the rupee headed closer and closer to the 78 per dollar-mark, climbing to a high of 79.17.

The data released after Indian trading hours on Thursday showed that the US economy contracted 0.9 per cent in the second quarter of 2022. This marked the second consecutive quarter of a contraction in the American economy. Some economists defined the two successive quarters of economic contraction as a recession.

The US GDP data came a day after the Federal Reserve raised interest rates by 75 basis points, taking the tally of rate hikes in 2022 to 225 basis points.

While the Fed has signalled more rate hikes to tame elevated inflation in the US, growing concerns over slowing economic growth have increased speculation that the central bank will slow down the pace of rate hikes. The revised view on the pace of the Fed’s rate hikes led to a sharp decline in the US dollar index, which measures the American currency against six major rival currencies.

The US dollar index fell to a low of 105.42 on Friday, Bloomberg data showed. The index had earlier this month climbed to a 20-year high of 108.54.

The aggressive pace of monetary tightening by the Fed, so far, this year and the consequent dollar strength had led to an exodus of overseas funds from Indian equities, exerting considerable pressure on the rupee this month. On July 19, the rupee weakened to a lifetime low of 80.06 to a dollar.

With the dollar index now significantly cooling off, foreign institutional investors’ appetite has been showing signs of buying interest in Indian equities after nine consecutive months of net sales.

Banks were said to have sold dollars for foreign institutional investor purchases of Indian assets on Friday, further bolstering the rupee, dealers said.

So far in July, foreign portfolio investors’ net outstanding purchases of Indian stocks stand at $618 million, NSDL data showed.

“The rupee appreciated against the dollar amid dollar sags and risk assets gains. The institutional and remittance-related dollar inflows also supported the rupee,” Dilip Parmar, HDFC Securities research analyst, told Business Standard.

“Spot USD/INR is near to breaking below a technical level of 79.20 after marking seven consecutive monthly gains (for the dollar). At this level, if bulls don’t show up, the pair can see another leg down towards 78.90 and more,” he said.

In the week ahead, currency traders expect the rupee to be confined to a thin band as the Reserve Bank of India is scheduled to announce its monetary policy statement.

The Indian central bank is seen raising the repo rate by around 35-50 basis points as it seeks to rein in elevated domestic inflation. “The major focus now is on the RBI policy meeting due next week where the central bank is widely expected to hike interest rates by 40 bps to release some pressure from outflows and close the interest rate differential gap between India and US,” CR Forex Advisors wrote.