Rupee Weakens On Higher U.S. Inflation, Dovish MPC

The Indian rupee fell to a near two-week low on Friday, led by higher-than-expected U.S. inflation and a dovish stance taken by local monetary policy authorities.

The rupee opened weaker at 75.33 compared to its previous close of 74.95, according to data from Bloomberg. It weakened further during the day.

The rupee opened weaker post the release of higher-than-expected U.S. inflation data, said Imran Kazi, vice president at Mecklai Financial. U.S. consumer inflation rose to 7.5% year-on-year in January compared to a rise of 7% in December. The print was the highest in nearly four decades. On a month-on-month basis, inflation rose by 0.6%.

Immediately post the CPI print, even as the dollar strengthened, Federal Reserve board member James Bullard's hawkish comments brought about another twist, according to a note by IFA Global Research Desk. Bullard advocated a full 1% hike by July with the liftoff beginning in March with a 50-basis-points hike, following which the dollar strengthened further.

Fed Fund futures contracts indicate that the odds of a 50-basis-points rate increase next month have climbed to 85% from around 30% before the inflation data, Kazi said.

Meanwhile, the Reserve Bank of India maintained a status quo on the benchmark repo and reverse repo rates, even as economists expected the central bank to step up the pace of normalisation.

The rupee weakened to 75.07 post the policy announcement. "Rupee forwards crashed post the policy with one-year forward yield dropping 20 basis points to 4.16% as implied rate differentials between the U.S. and India narrowed on a dovish RBI despite a hawkish Fed," the note by IFA said.

The range for the rupee has now shifted to 75-75.5, Kazi said.