Rupee Weakens as Strong USD Offsets Oil Drop & India PMI

Key Moments

Dollar Strength Pressures Rupee

The Indian Rupee (INR) weakens against the US Dollar (USD) on Wednesday, giving back part of its recent gains. The USD/INR pair trades modestly higher, hovering near 95.72, as the Greenback benefits from persistent expectations that the Federal Reserve will extend its monetary tightening campaign through the rest of the year.

At the time of writing, the US Dollar Index (DXY), which tracks the USD against six major currencies, is up 0.17% around 100.73, its highest level in more than seven weeks. According to the CME FedWatch tool, market participants assign nearly a 90% probability that the Fed will implement at least one additional interest rate increase before year-end.

Fed Officials Reinforce Hawkish Outlook

Analysts at MUFG highlight that these rate expectations “were supported by hawkish comments from regional Fed presidents although neither are voting members this year.” They call particular attention to Chicago Fed President Austan Goolsbee, who “will become a voting member again from next year,” and who warned that “supply shocks have come more frequently, hit harder and lasted longer and once supply shocks to inflation become persistent, some of the logic behind ‘looking through’ no longer holds,” a statement that bolsters the argument for maintaining tighter policy for longer.

On Tuesday, Richmond Fed Bank President Thomas Barkin, also a non-voting member at present, signaled that additional rate moves will be needed to contain inflation, while avoiding specific forward guidance on the eventual peak in policy rates. “Will additional hikes be required, and how many? ​We’ll see,” Barkin said, Reuters reported.

Oil Prices Slide on US-Iran Diplomacy Hopes

Crude oil remains under pressure as investors react to signs of possible diplomatic progress between the United States (US) and Iran, a development that could ease concerns about disruptions to energy supplies passing through the Middle East. Optimism picked up after Kyodo News reported that a senior Iranian official confirmed Tehran had sent a proposal to Washington via intermediaries, indicating Iran would reopen the Hormuz Strait within seven days in exchange for a reduction in US military activity near its seaports.

At the opening of Wednesday’s session, the MCX Crude Oil contract expiring on October 19 trades 1.43% lower, around Rs. 8,520, marking its lowest level in two weeks. Softer crude prices are typically supportive for currencies of large oil-importing economies, including India, as they relieve pressure on trade balances and import costs.

In a speech at United Nations (US) General Assembly on Tuesday, US President Donald Trump said that either Washington will make a deal or will drive the nation to hell. “I have a big decision to make on whether to make a deal or drive Iran into hell with no chance of survival and no hope of future greatness or generations.” Trump said. He reiterated stress that Iran will never have a nuclear weapon and the deal with the nation will be made right after midterm elections.

India’s Flash HSBC PMI Points to Firm Growth Momentum

India’s preliminary HSBC Composite Purchasing Manager’s Index (PMI) reading for September indicates an acceleration in activity. The Composite PMI climbed to 56.5 from 54.3, driven by solid performance in both manufacturing and services.

“Activity in the private sector gained momentum, led by stronger manufacturing. Output and new domestic orders rose at faster rates,” said Pranjul Bhandari, chief India economist at HSBC. She noted that renewed tensions in the Middle East had encouraged companies to build buffers to navigate uncertainties, while pricing pressures intensified among manufacturers.