Rupee logs best single-day gain in 4 years as Fed hikes seen slowing

The rupee surged against the dollar on Friday, posting its sharpest single-day gain in almost four years, as a lower-than-expected US inflation print led to hopes of the Federal Reserve adopting a slower approach to policy tightening.

The rupee closed at 80.81 on Friday, exactly 100 paise stronger than 81.81 at previous close. Friday’s move marked the largest single-day gain in the rupee since December 18, 2018, Bloomberg data showed. The closing level on Friday for the rupee is also the strongest since September 21, 2022, the data showed.

So far in 2022, the rupee has depreciated 8 per cent against the greenback.

Data released after Indian trading hours on Thursday showed that US CPI inflation fell to a nine-month low of 7.7 per cent in October, lower than market expectations of a reading close to 8 per cent.

With US inflation – which has stubbornly hovered near 40-year highs for many months – finally showing signs of easing, traders were of the view that Fed may ease up on future rate hikes following a series of aggressive increases. The Fed has hiked rates by 375 bps since March 2022, with the last four increases each being of 75 bps.

Higher US interest rates prompt global funds to flow to the world’s largest economy, leading to a stronger dollar. This exerts pressure on emerging market currencies such as the rupee.

“October Inflation downward surprise provides a long-overdue and welcome signal that price pressures could be starting to cool. With core CPI also finally showing downward momentum, the “Powell pivot” is in play – probability of a 50 bps (Fed) hike in Dec has shot up to 81% from 57% yesterday,” Madhavi Arora, lead economist at Emkay Global Financial Services said.

The US data caused the greenback to weaken sharply, with the dollar index at 107.32 at 3:30 pm IST. The index was 110.93 at the same time on Thursday.

“We had seen a peak of 114-115 on the dollar index and in fact at that time, the market was worried that it could even touch 119-120. That was the peak of bearishness. Now that the dollar index has materially come off, that means two things – one, the pressure from the dollar side is over,” Nitin Agarwal, head of trading at ANZ Bank, said to Business Standard.

IFA Global’s CEO Abhishek Goenka sees the rupee heading to the 80 per dollar mark in coming days, while Finrex Treasury Advisors predicted a range of 80.20-81.50/$1.

The softening in the dollar index has provided relief to the rupee after a couple of months of heightened volatility. For the month starting September 21 the rupee had weakened 4 per cent against the dollar, touching a lifetime low of 83.29 per dollar on October 20. Over that period, the rupee had suffered to a greater extent than most of its emerging market peer currencies.

“The next technical level that people are talking about for the dollar index is 105-106. The range that people are seeing is 105 to 109 for now. If that were to happen, then of course the dark clouds may have lifted for now,” ANZ Bank’s Agarwal said.