The Indian rupee is expected to remain under pressure and may test new levels, falling to 81 against US dollar, in near-term amid US Federal interest rate hikes fears. The aggressive rate hikes will dampen demand and increase the possibility of a recession in the US which could accelerate the pace of capital outflows, weaken the rupee, according to experts. In the previous session, rupee rebounded by 39 paise to close at a nearly two-week high against the US dollar, supported by foreign fund inflows and a correction in crude oil prices. At the interbank forex market, the local unit opened at 79.92, and ended at 79.52 against the greenback, up 39 paise from its previous close.

“The Indian rupee could start the month on muted note following foreign fund inflows, steady regional peers and lower crude oil prices. However, risk-averse sentiments and weaker high-frequency data might limit the gains in the local unit. On Tuesday, spot USDINR fell 51 paise or 0.64% to 79.46 on month-end rebalancing related to dollar inflows and lower crude oil prices. The technical set-up has turned slightly bearish with negative divergence but price confirmation is needed to make a clear view as the pair is still holding well above short-term moving averages. In the near term, the pair is having support at 79.20 and resistance at 79.80.”

“Rupee after falling to fresh all-time lows against the US dollar rose following rush of fund inflows in equity and debt segment. August also marked the first month this year when overseas investors turned net buyers of India’s government debt. The rupee’s strength on Tuesday came also on expectation of RBI stepping in to prevent the currency from trading under 80 per dollar. Data released yesterday showed that Indian economy grew 13.5% year-on-year in the April-June quarter, the fastest pace in a year amid fears of growth sharply slowing this quarter and the next two as higher interest rates hit activity. Services growth remains strong and that testifies to continuing shift in demand from goods to services as pandemic fades away.”

“On the other hand, the dollar eased against a basket of currencies but remained near the 2-decade high hit on Monday, as traders braced for more interest rate hikes from the U.S. Federal Reserve. Near term volatility could remain high as the Federal Reserve is determined to keep interest rates higher for longer, even as recession looms in the world’s biggest economy.  Today, focus will be on the final manufacturing PMI number from the US, Euro zone and the UK. We expect the USDINR(Spot) to trade with sideways and quote in the range of 79.40 and 79.80.”

“USDINR spot closed 45 paise lower on expectation that GOI bonds may get included in the global indices sooner. Long liquidation drove prices lower. Rupee was one of the strongest currencies today. Over the near term, we could see more downside, possibly towards 79.25/30 levels on spot, on account of long liquidations but once the positioning becomes light, we could see USDINR rebound due to strong US Dollar Index. We expect a range of 79.25 and 79.85 on spot.”

“Indian Rupee is down by 7% YTD against the US dollar and is likely to scale further lower as Federal Reserve has proclaimed that the US monetary policy probably needs more tightening until inflation is under control. Although the central bank did not provide cues on the size of rate hikes in September and ensuing policy meetings, investors are paring back expectations that the Fed could tilt to a slower pace of rate hikes. For what it’s worth, the Fed funds futures market is now assigning a 70% probability to a 75-basis point rate increase in September.”

“On the INR outlook, it seems the path of least resistance is on the downside. Having said that, USD/INR will likely inch towards the 81 mark but we do not see a major downside as RBI remains committed to preserving the INR in a confined range. Needless to mention, RBI’s war chest in terms of adequate FX reserves to counter the volatility in INR. Also, FII flows into equities remain positive, while markets will derive courage from an imminent possibility of the inclusion of Indian bonds in global indices.”