The rupee opened 19 paise higher at 95.56 against the US dollar on Thursday, 20 August, supported by a weaker greenback that fell to a three-month low after the US Treasury announced measures to increase buybacks of longer-dated bonds and ease pressure in the bond market.
However, traders cited by Reuters expect the rupee’s recovery to remain limited beyond the initial gains, amid elevated crude oil prices and a weak near-term outlook for the Asian currency.
The Dollar Index declined 0.88% on Wednesday, marking its sharpest single-day fall since mid-March. The decline came after the US Treasury announced plans to double the size of its liquidity-support operations for longer-dated bonds.
The move followed a selloff in long-term US Treasuries that pushed the 30-year Treasury yield to its highest level since 2007, amid concerns over inflation and rising term premiums.
Analysts clarified that the Treasury’s move does not constitute quantitative easing, with ING Bank noting that purchases of longer-maturity bonds would be financed by issuing short-term debt.
Following the announcement, the 30-year US Treasury yield fell to 5.18%, around 16 basis points below its recent high, while the 10-year yield declined to 4.64%.
Treasury move to ease bond-market pressure
The US Treasury plans to at least double its purchases of longer-term government bonds to $4 billion per operation from 9 September, while raising more funds through short-term Treasury bills. The move aims to ease pressure on long-term yields and smooth the refinancing of the US government’s large debt burden. While it resembles an Operation Twist-style strategy, it is not traditional Federal Reserve quantitative easing.
Market impact
Higher Treasury demand for long-term bonds could keep 10-year and 30-year yields lower, easing borrowing costs. The weaker dollar and lower yields are also supportive for gold and silver, while easier financial conditions could provide modest support to inflation.
Rupee faces mixed cues
The softer dollar could offer some relief to the rupee, but oil prices above $90 remain a major risk for India’s import bill.
India’s valuation concerns
Meanwhile, India has emerged as Asia’s least-preferred stock market in BofA’s latest survey, with 32% of fund managers net underweight, citing expensive valuations and weaker growth prospects.
Rupee Outlook
According to Amit Pabari, MD, Research Team, CR Forex Advisors, immediate support for the rupee is near 95.30–95.50. As long as this holds, USD/INR is expected to gradually move towards 96.20–96.50.
The weaker dollar may create short-term pauses, but oil and sentiment remain fragile. Dips are therefore likely to be shallow and short-lived rather than a genuine trend reversal.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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