On Wednesday, the Indian rupee may depreciate a little as a result of the rise in U.S. yields due to the potential for a hawkish Federal Reserve decision.

A rise in US yields may cause the rupee

The rupee will likely start the day somewhat worse against the dollar than it did on Tuesday, according to non-deliverable forwards, at 81.87.

Before the Reserve Bank of India reportedly intervened, the local currency managed to achieve a more than two-month high of 81.6650 on Tuesday.

The probabilities are that we will see a return to the 82 handles, an fx salesperson at a bank said, as the RBI has once again dashed any prospects of a greater surge on the rupee.

Although I do not anticipate the impact (on the rupee) to persist longer than a day, what happens to the currency and U.S. yields following the Fed is undoubtedly significant.

Before the Fed made its rate decision later on Wednesday, the dollar index edged up, Asian currencies fell, and the two-year U.S. yield touched 4.90%. Currently, a rate increase of 25 basis points is completely priced.

Given that investors are mostly of the opinion that the hike in July will be the final one for the current cycle, Jerome Powell’s remarks will be what garner attention.

Despite the previous Fed dot plot predicting one more rate hike beyond July, investors have bet that no further rate hikes will be necessary due to softer inflation estimates.

In a note, Capital Economics predicted that Powell “will argue in his press conference that further rate increases are still possible.”

“Despite this, we anticipate a run of more encouraging inflation data over the upcoming months to ensure that the July hike will serve as the peak.”