News Analysis

Rupee gets a breather as Fed intends to hike rates only thrice this year

Gurumurthy K | Updated on March 22, 2018

The Indian rupee, which was threatening to decline steeply once it breached the 65 level in the initial part of the week, got a breather on Thursday. The US Federal Reserve on Wednesday increased the interest rates by 25 basis points to 1.5 to 1.75 per cent. This relieved the markets that expected the Fed to increase rates four times this year on the back of an improving economic outlook.

Jerome Powell, the new Fed Chairman, acknowledged the strength of the economy by revising the growth outlook higher for this year and the next in his first policy meet, but decided to stick to the central bank’s earlier plan of three rate hikes this year. The US is projected to grow at 2.7 per cent in 2018, up from 2.5 per cent projected in December. For 2019, the growth rate has been revised higher to 2.4 per cent from 2.1 per cent projected earlier in December.

The decision to leave the rate hike path unchanged disappointed the dollar bulls and has dragged the dollar index lower by 0.9 per cent, from around 90.4 to current levels of 89.55. As a result, the Indian rupee, which was hovering below 65.20, recovered on Thursday and is currently trading at 65.07 against the dollar.

Another factor that might have disappointed the markets could be the inflation projection. Though economic growth has been revised higher, there was no change in the inflation projection. Inflation is projected to remain at 1.9 per cent in 2018 and 2 per cent in 2018, both unchanged from the December forecast. As such, a higher revision in inflation projections in the coming months could boost the dollar.

The Fed Chairman said in his press conference that the unemployment rate should continue to sustain at a lower level in order to push inflation higher. The Fed expects the US unemployment rate, currently at 4.1 per cent, to come down to 3.8 per cent in 2018 and 3.6 per cent in 2019, both revised higher from the December projection of 3.9 per cent in 2018 and 2019.

Rupee outlook

The short-term bias is turning bearish for the dollar index. It can fall to 89 or even 88.5 in the coming days on a break below the immediate support at 89.4. Such a fall in the index will increase the likelihood of the rupee breaking above 65. Such a break will see the rupee strengthening towards 64.85 or 64.80 in the coming days. The region between 65.25 and 65.30 will now be a key support. The rupee will come under pressure for a fall to 65.5 or even lower only if it breaks below 65.30.

Published on March 22, 2018

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