Rupee boosted by US yield decline, pegged back by risk aversion

Another day, and the Indian rupee (₹) and the US dollar ($) are on track to test their pace. The pair was last seen registering a strength of ₹83.27. It aligns with the expectations that the INR would open as cold as it closed the last session. The US dollar is split in pieces, and the Federal Reserve has yet to announce a date for a rate cut.

There is no doubt that a rate hike is a far-fetched dream; however, an announcement on a cut would offer clear water clarification for traders to better reflect on their movements. The US yield is at its lowest since late July amid uncertainty over the rate, a fall in economic performance, and childlike, uncontrolled inflation. Not that there is no positive on the last note, for inflation is determined to stay in touch with expectations.

Having said that, US yield and risk aversion will play a pivotal role in determining how the INR leaves a mark in the days to come.

Factors Affecting the Decline in US Yields

US yields, simply put, are what the US government pays on its debt obligations. Another way to understand this is that US yield is the rate of return that investors can expect from the US government securities they have in their portfolio. A lower rate reflects poorly on the investors, while an upper rate is positive and reflects a better situation.

Reports surfacing have put the number at 3.86 at the time of drafting this article. This is a fall from ~4.98, which was achieved in October this year. Investors continue to bet on the safe haven under the assumption that the Fed’s March meeting will bring down the rate. There is almost an 80% chance, with the remaining percentage reserved for the meeting that follows.

• The US inflation rate is somewhat closer to 3.14%. This is a bright slip considering the same was at 3.24% in the last month. The target is ideally to bring the rate down to 2%; however, the only option with the Fed is to wait and see how the situation rolls out. A hike would upset the market, and a decline could mean setting a date with the devil. 
• Global events like the Russia-Ukraine war and Israel’s defense against Hamas are setting a different stage altogether. Another incident that could potentially upset the numbers is the emerging fight with Houthis in the Red Sea. Ten nations are expected to join hands and defend their ships to avoid taking a longer route and, hence, an increased price. 
• Investor sentiment is influenced by how the economy behaves or is expected to perform over the next three to four years. So far, so good: feelings have been scored over 50%, up from 47.31% the previous week. This is in reference to bullish sentiments. That is, a positive influx could be recorded.

These factors may not necessarily be leading to a downfall in the US yield since they alternatively project a sense of recovery. Nevertheless, a further rise would indeed help the US yield recover from its slip.

The Positive Impact on Rupee

A movement of the US dollar on the graph affects other currencies. Most international trade still happens under the umbrella of the US dollar. Therefore, its strengths and weaknesses determine if other currencies perform well or not.

If the US yield drops, investors would want to look in another direction where they see more light coming. A chance at other regions and their currencies would automatically fetch better results for them. If the US dollar loses its value, the import-export business changes its dynamics accordingly to offer more cushion to countries like India. The Rupee supported by a decline in US yields, sounds less sustainable but remains on the edge of optimism.

India benefits from the rise in investment in the private and public sectors. With the US dancing to its own tunes, investors will express their concerns before moving out or diversifying their geographical reach.

Conclusion

A drop in US yields sets the kind of stage that the US may not be ready for. It will lessen the impact on INR at the moment but help make up for what happens in the next few months. Risk aversion is an option that cannot be avoided, especially at a time when India is outperforming other countries by beating global inflation.

The number for December 2023 would portray a better picture for 2023, helping to understand how 2024 could play out for the world.