The rupee gains after India’s inclusion in the JPM bond index

Earlier in the month, the rupee weakened and fell to an all-time low after data showed the trade deficit widened to a 10-month high of $24.2 billion in August from $20.7 billion the previous month. At the end of the week, JP Morgan announced the inclusion of India in its emerging market index.

The Index Provider will include securities in the JPMorgan Emerging Markets Government Bond Index beginning June 28, 2024, with a maximum weighting of 10%. The inclusion is likely to lead to inflows of nearly $30 billion, strengthening the rupee.

As expected, the Federal Reserve kept the benchmark interest rate unchanged, but hinted at another rate hike later this year. The latest indicators suggest that economic activity has steadily increased. Job growth has slowed in recent months but remains strong and the unemployment rate has remained low. The central bank’s measure of headline inflation is expected to fall to 3.3 percent by the end of this year, 2.5 percent next year and 2.2 percent by the end of 2025.

The dollar rallied against its major crosses after the policy statement was released. For important crosses, both the euro and the pound weighed on the strength of the dollar and also when the Bank of England decided to pause exchange rates. The pound weakened against the US dollar after the BoE decided to leave interest rates unchanged. The BoE ended its long run of 14 consecutive interest rate hikes as Britain’s economy slowed, but said it was not taking the recent drop in inflation for granted. The BoE governor welcomed the recent decline in inflation and the BoE’s forecasts that it will slow further. The BoE cut its July-September forecast to just 0.1 percent from 0.4 percent in August. The Eurozone and the UK’s preliminary PMI are expected to fall in September.

There were no major signals on the domestic front this week and global factors continue to weigh on the rupee. The dollar, which rose after the FOMC’s policy statement, extended its gains after economic data from the eurozone and the UK missed estimates. U.S. market participants will look to the constants, final GDP and the key PCE index to gauge sentiment on the currency. Better than expected economic indicators are likely to support the US dollar. We expect USDINR (Spot) to trade between 82.50 and 83.20 this week.

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