NEW DELHI: The rupee weakened against the US dollar on Thursday as the minutes of the Federal Reserve’s December policy meeting suggested that the central bank could raise interest rates at a quicker pace than earlier envisaged.
The partially convertible rupee settled at 74.49/$1 as against 74.36/$1 at the previous close. The Indian currency, which had started the day at 74.4450/$1, moved in a band of 74.3200-74.5075/$1 during the day.
The minutes of the Fed’s December meeting, which were released after Indian trading hours on Wednesday, showed members of the US rate–setting committee displaying a significant degree of concern regarding inflationary pressures in the world’s largest economy.
The policymakers were also of the view that it may be appropriate for the Fed to trim its balance sheet at a quicker pace.
In December, the Fed had signalled that it could execute three rounds of 25 basis point rate hikes in 2022. Speculation is now rife that the first of these could be announced as early as March.
Higher US interest rates typically reduce the lustre of assets in riskier emerging markets such as India.
Record-low US interest rates and the flood of liquidity injected by the Fed in the global banking system through its pandemic-era asset purchases were key reasons behind large-scale foreign investment in Indian assets for much of 2021.
However, over the last three months of the previous calendar year, overseas investors made a beeline to exit Indian equities as the Fed said that it would tighten the liquidity spigot.
Domestic traders now await the release of non-farm payrolls data in the US, due after Indian trading hours on Friday.
A substantial addition to US jobs would further strengthen the case for the Fed to tighten policy at a faster clip.
“The rupee is seeing some expected correction after the huge rally towards the end of December,” a dealer with a foreign bank said on condition of anonymity.
“The dollar index broadly held on to the one-week high of 96.20-96.25 for most of the day and we have an event risk in the form of the NFP data. US yields have also surged past 1.70 per cent. In any case, the trade deficit data warrants a correction in the rupee; the thing now is to see where the RBI decides to draw the line,” he said.
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