Rupee Faces Pressure as Fed Rate Hike Expectations Add to Oil Price Strain

The Indian rupee came under renewed pressure on Wednesday, September 16, as expectations of a US Federal Reserve interest rate hike added to the impact of elevated oil prices and strong dollar demand.

The rupee closed at 95.9550 per US dollar after touching 95.9750, its weakest level since July 27. The currency has faced pressure for seven consecutive sessions, with traders closely watching whether it would move beyond the 96-per-dollar level.

Persistent intervention by the Reserve Bank of India (RBI) has helped limit the rupee's decline in recent sessions. Traders have also reported dollar selling by state-run banks, which they believed was likely carried out on behalf of the central bank.

key focus for currency markets was the Federal Reserve's policy decision later on Wednesday. Interest-rate futures were pricing in a 92.5% probability of a 25-basis-point rate increase, while swap markets were reflecting expectations of about 60 basis points of additional rate increases through the rest of the year.

Higher US interest rates can support the dollar and add pressure to emerging-market currencies. Investors were therefore watching the Federal Open Market Committee's statement, updated economic projections and comments from Fed Chair Kevin Warsh for signals about the future path of monetary policy.

Oil prices have added another source of pressure for India. Brent crude had climbed towards $110 a barrel, raising concerns about inflation and increasing the cost of India's energy imports. Higher oil prices can also put pressure on the country's external balances and demand for foreign currency.