MUMBAI: The Indian rupee is likely to strengthen further on Thursday boosted by the dip in US Treasury yields after the Federal Reserve decided to slow the pace of balance sheet runoff and indicated that it remained on pace to cut rates twice this year.
The 1-month non-deliverable forward indicated that the rupee will open at 86.34-86.36 to the US dollar compared with 86.4425 in the previous session.
The rupee is on a six-session winning run, during which it has rallied by over 1%.
The extent of the ongoing “against-the-trend” rally in the rupee has “definitely been a surprise”, a currency trader at a Mumbai-based bank said. “I would not bet on this going any further from here.”
The 2-year US Treasury yield declined about 6 basis points on Wednesday to slide below 4%.
Indian rupee likely to dip; Fed’s updated forecasts loom
The Fed said that beginning next month it will slow the pace of its balance sheet reduction (quantitative tightening) and the dot plot indicated that the US central bank will cut rates twice this year, boosting demand for Treasuries.
Morgan Stanley in a note said the decision to slow the pace of balance sheet runoff was a surprise. Goldman Sachs said it expected the Fed to slow the pace of runoff at a later meeting in May.
ING Bank said the Fed’s decision was “big news” and US Treasuries are considering this early move on quantitative to be bullish.
On the Fed’s median dot plot, which was unchanged from December, analysts pointed out before the meeting there were worries that policymakers would take a more hawkish tone amid the risk of higher inflation posed by the new US tariffs.
The Fed did raise its forecasts for inflation, while cutting its projections on growth.
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