Rupee gains as Fed’s Jerome Powell hints at slower US rate hikes

The rupee and government bonds strengthened sharply on Thursday after Federal Reserve Chairman Jerome Powell hinted that going forward, the US central bank may reduce the pace of what has been an extremely aggressive policy tightening cycle so far in 2022.

The domestic currency closed at 81.22 per dollar on Thursday as against 81.43 per dollar at previous close. The rupee has appreciated 0.6 per cent over the last couple of days. So far in 2022, however, the local unit has depreciated 8.5 per cent versus the greenback.

Late Wednesday, Powell said at the Brookings Institute, that smaller rate increases by the Fed were likely going ahead. The US dollar index fell to a low of 105.31 during Indian trading hours on Thursday. The index had closed at 105.95 on Wednesday.

So far in 2022, the Fed has hiked rates by a total of 375 bps, leading to a stronger dollar and diminishing the appeal of emerging market assets.

Yield on the 10-year government bond settled seven basis points lower at 7.21 per cent on Thursday. Bond prices and yields move inversely. A fall of one basis point in the 10-year bond yield corresponds to a rise in price of roughly 7 paise.

Apart from tracking a decline in US bond yields following Powell’s comments, Indian sovereign bonds also gained after the release of India’s second quarter GDP data post market hours on Wednesday. The data, which showed GDP growth slowing to 6.3 per cent in July-September from 13.5 per cent in April-June, has led to bond traders hoping for a slower pace of rate increases by the Reserve Bank of India, dealers said.

“After the GDP data, there is a feeling in the bond market that the Monetary Policy Committee (MPC) will hike rates by about 35 bps in December and then there could be a divided house,” ICICI Securities Primary Dealership’s head of trading Naveen Singh said.

“Heading into the RBI’s policy review on December 5-7, we could see the 10-year bond yield fall below the 7.20 per cent mark,” he said.

Currency traders said with the rupee having strengthened past the technically significant levels of 81.45 per dollar and 81.30 per dollar over the past two days, importers made a beeline to lock in dollar purchases at relatively cheaper levels.

This led to the rupee giving up some gains from the day’s high of 80.99 per US dollar on Thursday.

“A combination of positive factors like Fed Chair Mr Powell’s comments on future rate hikes, risk on mode and lower oil prices helped rupee appreciate against the dollar today,” Bhaskar Panda, HDFC Bank’s executive vice-president of overseas treasury, said.

“Rupee appreciation bias will remain as long as global factors remain favourable. A range of 80.5-81.5 is more like to be trading range in USD/INR pair in near future,” he said.