The Indian rupee weakened slightly as U.S. inflation reports signaled rising costs due to tariffs, diminishing expectations for Federal Reserve rate cuts and boosting the dollar.
The Indian rupee closed at 85.94 per U.S. dollar on Wednesday, marking a decline of 0.1% from its previous close of 85.81. This move was influenced by the latest U.S. inflation data, which indicated that tariffs were starting to drive up prices, consequently weakening the likelihood of rate cuts by the Federal Reserve. This pushed U.S. Treasury yields higher and gave a lift to the dollar.
The dollar index stood at 98.5, close to the three-week high reached on Tuesday, while most Asian currencies traded flat to slightly lower. U.S. consumer prices showed the largest jump in five months in June, highlighting the impact of tariffs on certain goods.
According to the CME’s FedWatch tool, the probability of the Federal Reserve maintaining its current rate levels in September has increased to almost 50%, a significant rise from about 30% the previous week. This shift comes amid ongoing pressure from U.S. President Donald Trump, who has consistently criticized Federal Reserve Chair Jerome Powell for not reducing benchmark interest rates.
MUFG noted, “Building evidence of the pick-up in inflation from tariffs supports the Fed’s caution over resuming rate cuts in the near-term despite the barrage of criticism from the Trump administration.”
The stronger dollar pushed the rupee below the 86 mark during early trading on Wednesday. However, the rupee recovered as a surge of dollar selling interest emerged at this level, noted traders from a state-run bank. They also highlighted dollar sales by large custodian banks, typically indicating foreign portfolio inflows, as another factor bolstering the rupee.
In India’s stock markets, the BSE Sensex and the Nifty 50 indices closed slightly higher, despite declines seen in most regional markets.
Market participants are now focusing on upcoming U.S. wholesale inflation data and remarks from Federal Reserve policymakers for further indications on the future path of U.S. interest rates. Additionally, updates on U.S. trade negotiations remain in view, although market reactions to these have become more muted compared to earlier in the year.