Rupee slips vs US dollar as Fed minutes show fresh calls for faster taper, higher interest rates

NEW DELHI: The rupee weakened against the US dollar on Thursday as hawkish comments by several officials of the US Federal Reserve fuelled speculation of interest rates rising sooner than later in the world’s largest economy, propelling the dollar to near-16-month highs, dealers said.

The partially convertible Indian currency settled at 74.5100 per US dollar as against 74.3950/$1 on Wednesday. The rupee, which had started the day at 74.5450 /$1, moved in a band of 74.4700-74.5775/$1 in the course of the day.

Minutes of the Federal Reserve’s November policy meeting, released after Indian trading hours on Wednesday showed that various members were in favor of adopting a faster pace of bond tapering or rollback of quantitative easing amid runaway inflation in the US. The minutes also hinted at a potentially faster pace of tightening monetary policy.

The dollar index, which measures the greenback against six major rival currencies, touched a 16-month high of 96.938 on Wednesday. The index, which was at 96.06 at the end of the previous week, was last at 96.71.

“The USD (DXY Index) has appreciated by 2.9% in Nov-21 so far– its largest monthly gain in last 5-years. Resurgence in COVID infections (esp. in Europe) and Fed’s lead in monetary policy normalization among G3 central banks is supporting it,” economists from QuantEco Research wrote.

Yields on US Treasury bonds have also climbed on speculation of interest rates heading higher in the country, with the 10-year US government bond yield climbing around 11 basis points in the last couple of days. The 10-year US yield was last at 1.63 per cent.

A stronger dollar and higher US bond yields typically diminish the lustre of emerging market assets such as the rupee and Indian government bonds, potentially leading to outflows of overseas investment.

While foreign portfolio investors have largely held on to certain government bonds which are eligible for full investment and therefore likely to be candidates for the eventual listing of Indian debt on global indices, overseas investors have been pulling funds out of Indian equities of late, official data showed.

The rupee did however get some respite on Thursday as some banks sold the greenback on behalf of exporters, noting higher dollar/rupee levels, dealers said.

“There was support for the rupee at the 74.50/$1 level because exporters chose to lock in that level,” a dealer with a foreign bank said on condition of anonymity.

“But the bias is clearly for depreciation, even from a REER (real effective exchange rate) point of view there is space for the rupee to correct. Given the Fed’s tone, we expect 75/$1 in coming weeks,” he said.

Government bonds were steady with the yield on the 10-year benchmark 6.10 per cent 2031 paper settling flat at 6.37 per cent. Bond prices and yields move inversely.

Bond traders preferred to stay on the sidelines ahead of fresh supply worth Rs 24,000 crore hitting the market through a primary auction on Friday. The benchmark yield moved in a band of 6.36-6.37 per cent in the course of the day.

Banks prefer to avoid fresh exposure to dated securities as the Reserve Bank of India’s next policy statement (December 8) draws nearer, with several segments of the market anticipating a hike in the reverse repo rate.

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