The Indian Rupee (INR) depreciated against the US Dollar (USD) on Thursday, following an earlier upward move, as US Treasury yields surged to their highest levels in two decades. The USD/INR pair climbed to near 95.93, reflecting the pressure on the Indian currency amid a rally in US bond yields, with the 10-year US Treasury yield reaching approximately 5.31% as of writing [1]. Higher US yields have reduced the attractiveness of riskier assets like the Indian Rupee, supporting the Dollar's strength [1].
The rally in US Treasury yields is attributed to persistent warnings from Federal Reserve (Fed) officials about ongoing inflation risks, particularly those stemming from energy supply shocks. Fed's Kashkari delivered a notably hawkish message, with the FXS Speechtracker score at 7.1 compared to a historical average of 6.2, emphasizing concerns that inflation near 3% remains elevated and that resilient economic growth may indicate monetary policy is not as restrictive as previously thought. Kashkari also highlighted the possibility of one more rate hike this year and another in 2027, reinforcing expectations of a prolonged period of restrictive policy, which is broadly supportive of the US Dollar [1].
Despite the hawkish tone, the FXS Fed Sentiment Index slipped by 0.42 points to 143.28, suggesting a slight moderation in perceived hawkishness, though the index remains well above the neutral line of 100. This indicates that while markets are adjusting expectations, they are not fundamentally reassessing the Fed's policy stance [1].
Looking ahead, the US Nonfarm Payrolls (NFP) data for September, set to be released on Friday, is seen as the next major catalyst for the US Dollar and could influence market expectations regarding the Fed's monetary policy outlook. The CME FedWatch tool currently shows a 62.4% probability that the Fed will keep interest rates unchanged at its upcoming policy meeting, a significant increase from the 29% probability seen a week earlier. Strong ADP Employment Change data, with the private sector adding 90,000 jobs in September compared to an estimate of 70,000 and August's 36,000, has set a positive tone ahead of the official employment report. Additionally, investors are awaiting the US ISM Manufacturing PMI data for September, which is expected to rise to 55.0 from 54.6 in August [1].
CONCLUSION
The Indian Rupee's decline against the US Dollar is driven by surging US Treasury yields and a persistently hawkish Fed stance. Market participants are closely watching upcoming US employment and manufacturing data for further direction, with expectations for Fed policy remaining firmly restrictive. The overall market sentiment remains cautious and Dollar-supportive.