Rupee falls after JPMorgan index inclusion; RBI intervention expected

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The Indian rupee weakened on Monday, giving up the gains from the announcement of JPMorgan’s inclusion of Indian bonds in its emerging market debt index, as dollar demand from importers and high U.S. yields weighed on the currency.

JPMorgan index inclusion boosts rupee sentiment

On Friday, JPMorgan said it would include Indian government bonds in its widely-tracked Government Bond Index-Emerging Markets (GBI-EM) index series, starting from October 2023. This is expected to attract around $20 billion of foreign inflows into the Indian debt market over the next year, according to analysts.

The news boosted the rupee sentiment, as the currency strengthened to 82.8225 per dollar on Friday, its highest level since September 14. The rupee has been one of the worst-performing currencies in Asia this year, losing about 8% against the dollar so far.

Dollar demand and U.S. yields pressure rupee

However, the rupee rally was short-lived, as the currency fell to 83.12 per dollar by 11:00 a.m. IST on Monday, compared with 82.93 in the previous session. The dollar index, which measures the greenback against a basket of six major currencies, was largely flat in Asia, but remained near six-month highs.

Rupee falls after JPMorgan index inclusion

Month-end dollar demand from importers, including oil companies, will keep the rupee under pressure, a foreign exchange trader at a state-run bank said. “But it won’t weaken below 83.20 as RBI is likely to protect those levels.”

The Reserve Bank of India (RBI) has been intervening in the foreign exchange market to curb the rupee’s volatility and prevent excessive appreciation, as it tries to balance the need to support economic recovery and contain inflation.

U.S. economic data and Fed policy in focus

The rupee was also affected by the rise in U.S. Treasury yields, which increased the appeal of the dollar. The 10-year U.S. Treasury yield was higher in Asia at 4.46% and the 2-year yield was at 5.10%, not too far away from multi-year highs.

The offshore Chinese yuan, which often influences the rupee’s direction, weakened against the dollar, while Brent crude futures were slightly higher.

“As long as 82.80 holds, bias on the rupee will be towards depreciation,” said Dilip Parmar, a foreign exchange research analyst at HDFC Securities. The local unit is likely to stay below 83 over the next couple of days, Parmar added.

Investors will now be keeping a keen eye on U.S. second-quarter GDP data and core personal consumption expenditure (PCE) inflation numbers due later this week, for further cues on how the U.S. Federal Reserve may act on policy.

The Fed has signalled that it may start tapering its bond purchases by the end of this year, and may raise interest rates in 2023, depending on the economic outlook and inflation pressures.

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