Will The US Fed’s Decision Trigger A New Low For Rupee This Week?

The Indian rupee may face renewed pressure this week as anaemic trade and investment flows continue to weigh on the currency, while the U.S. Federal Reserve's policy decision will be the key macro cue for both the unit and government bonds.

The rupee closed at 89.98 per U.S. dollar on Friday after hitting an all-time low of 90.42 last week. For the week, the currency was down 0.6%.

Bankers and traders reckon that a meaningful turnaround in the currency's fortunes is unlikely unless there is a breakthrough in U.S.-India trade negotiations.

The worries contributed to pushing the rupee past the 90 handle last week, with ANZ saying it could weaken further in a calibrated manner if elevated U.S. tariffs persist.

The rupee's slide did not feature strongly in the Reserve Bank of India's policy commentary on Friday, where it delivered a 25-basis-point rate cut.

"We believe this omission highlights the central bank's comfort with the current INR levels, especially given capital flows have dried up – at least for now," ANZ said in a note.

Traders expect the rupee to hover between 89.80 and 90.50 this week.

Meanwhile, the Fed is widely expected to cut benchmark rates by 25 bps on Wednesday, with investors monitoring its guidance for 2026. The dollar index logged its second consecutive weekly decline.

In Indian bond markets, the 10-year benchmark 6.33% 2035 bond yield settled at 6.5166% on Friday, down 3 bps this week. The 10-year 6.48% 2035 bond yield ended at 6.4944%.

Traders expect the yield to drift between 6.45% and 6.54%, with major action expected in the latter half of the week after the Fed decision and the first of two open market bond purchases announced on Friday.

Apart from the rate cut, the RBI said it would buy bonds and conduct a dollar/rupee buy-sell swap, infusing total liquidity of around 1.45 trillion rupees ($16.12 billion) over the two weeks.

"The policy supports sovereign bond demand and provides a strong anchor for domestic markets amid global uncertainties," said Niraj Kumar, chief investment officer at Generali Central Life Insurance.

The market will also keep an eye on activity from foreign investors, who turned sellers of Indian bonds last week.

Separately, Matthew Kok, portfolio manager of Asian fixed income at Eastspring Investments, said more proactivity might be needed on the monetary policy front to avoid a sharp slowdown in growth next year, leaving room for more rate cuts by the RBI.

 KEY EVENTS: 

• India November CPI inflation - December 12, Friday
• Federal Reserve monetary policy decision - December 11, Thursday
• September international trade - December 11, Thursday 
• Initial weekly jobless claims for week to December 6 - December 11, Thursday ($1 = 89.9340 Indian rupees)