During the week ending August 16, the Indian rupee saw little change, finishing at 83.95 with little variation. There was modest support for the rupee due to the US recession fears abating, carry trade unwinding slowing down, and oil prices easing. Pressure was applied, though, in part because of a larger trade imbalance in July and outflows from foreign capital. The rupee was however maintained rangebound by possibly RBI interventions.
Because of better-than-expected retail sales and a drop in initial jobless claims, the dollar index weakened by nearly 1% throughout the week, allaying fears of a US recession. In July, retail sales grew by 1% month over month, surpassing the predicted 0.3% gain and marking the biggest growth since January 2023. For the second week in a row, the number of persons filing for unemployment benefits decreased and was below market forecasts, suggesting that the US labor market may not be cooling off as quickly as first thought.
As a result, traders reduced their high-risk wagers on US Federal Reserve rate reduction; the likelihood of a 50 basis point (bps) rate cut in September fell to 25% from 50% a week earlier. With inflation continuing to approach the Fed’s 2% target, the market is currently pricing in a 75% chance of a 25 bps Fed rate cut in September. Concerns over weak Chinese demand trumped tensions in the Middle East, and by the end of the week, Brent crude oil prices had dropped to USD 79.6 per barrel from USD 82.1 at the beginning.
The rupee was under pressure as India’s merchandise trade imbalance increased to USD 23.5 billion in July from USD 20.9 billion in June and USD 18.9 billion in July of last year. Foreign portfolio withdrawals from Indian stocks persisted in August, with FPI withdrawals totaling USD 2.5 billion as of August 16. But thanks to India’s inclusion in the bond index, the debt segment received net foreign portfolio inflows of almost USD 1.1 billion during the same time period.
Although the preliminary annual benchmark revisions for US nonfarm payrolls will be released, the current assessment of the state of the labor market should remain unchanged.
In the near future, we anticipate that the rupee will trade between 83.60 and 84.10. The impending Fed rate reduction and waning concerns about the US recession could help it. FPI withdrawals and any increase in geopolitical unrest, however, might be detrimental to the rupee. If necessary, the RBI is expected to step in on both fronts to control the volatility of the rupee.
