Rupee falls as Fed gets ready to normalise its balance sheet

Gurumurthy K BL Research Bureau | Updated on January 10, 2018 Published on September 21, 2017


Upcoming bond sales coupled with one more rate hike this year boosts US dollar

The Indian rupee was beaten down on Thursday following the outcome of the US Federal Reserve’s two-day meeting that ended on Wednesday. The Fed confirmed its intention to begin balance sheet normalisation in October and take it forward in a gradual manner. It also left the median projection for the Federal fund rates for this year (2017) unchanged at 1.4 per cent. This leaves room for one more rate hike at one of the two meetings pending for this year on November 1 and December 13. The expectations are high for the Fed to increase rates in December.

US on a strong footing

The Fed is confident that the US economy is performing well, which the Fed Chair Janet Yellen reiterated in her press conference. Although concerns were raised about a slow-down in this quarter due to the impact of the storms, the Fed has raised the growth forecast for the entire year. It has projected the US to grow at 2.4 per cent in 2017, up from a 2.2 per cent growth projected in June.

The unwinding plan

The Fed will begin unwinding its $4.5-trillion balance sheet from October in line with the plan laid out in June. According to that, $6 billion of maturing Treasury securities will not be re-invested from October, which will be increased by $6 billion every three months until the outflow reaches $30 billion per month. For agency debt and mortgage-backed securities, it will begin with $4 billion per month and will increase it by $4 billion every three months until it reaches $20 billion each month.

That is, the Fed will begin unwinding with a total of $10 billion from October, which will become $50 billion in a year by October 2018, and will remain constant thereafter. So, with this plan, the Fed’s balance sheet will reduce by $1 trillion to $3.5 trillion by November 2019 from the current levels of $4.5 trillion. By March 2023, $3 trillion will be wiped-out from the balance sheet, provided there is no change made to the current plan.

Dollar surges

The dollar index, which was trading under pressure, got a boost after the US Federal Reserve meet on Wednesday. The index surged over a per cent from 91.5 to 92.7. It has come-off slightly from this high and is currently trading at 92.45. The key 200-week moving average resistance at 92.75 is capping the upside at the moment. If the index manages to surpass this hurdle, it can move further higher to 93.5 or even 94 going forward. But the inability to break above 92.75 can drag the index lower to 91.5 and 91 again.

Rupee under pressure

The Indian rupee, which was stuck in a narrow range around 64 over the last few weeks, has witnessed a sharp fall following the outcome of the Fed meet. The currency broke below a key short-term support level of 64.30 and fell to a low of 64.80. It has recovered from this low and is currently trading at 64.65.

The short-term outlook for the currency has turned negative. The region between 64.30 and 64.20 will now serve as a strong resistance and may cap the upside in the currency. There is a strong likelihood of the rupee weakening to 65 levels in the coming days. A further break below 65 will increase the possibility of the currency extending its fall to 66 levels over the medium-term.

Published on September 21, 2017
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