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The Indian rupee traded almost unchanged as investors awaited key U.S. labour market data. Treasury yields fell to four-month lows, reflecting expectations of a Fed rate cut later this month. Analysts suggest that weak U.S. employment figures may ease pressure on the rupee, but meaningful gains are unlikely without higher equity inflows or tariff relief. With current U.S. tariffs on Indian exports at 50%, the rupee could weaken further, potentially reaching 89 against the dollar by early 2026 if trade barriers remain.
The Indian rupee gave up modest early gains to trade largely unchanged as investors awaited the release of crucial U.S. labour market data. The U.S. dollar softened against most Asian currencies, while Treasury yields dropped to their lowest in four months, reflecting strong market expectations of a Federal Reserve rate cut later this month. Advertisement
The rupee was quoted at 88.1650 against the dollar, slightly higher than its previous close of 88.1450. The two-year U.S. Treasury yield, which is sensitive to interest-rate expectations, fell to 3.59% in Asia trading, extending its recent decline.
Market participants are now largely pricing in a 25-basis-point cut by the Fed, based on signs of weakening in U.S. labour data released recently. Analysts from MUFG indicated that any negative surprise in the jobs report or a downward revision in employment figures could exert further downward pressure on the U.S. dollar.
Traders added that while a soft U.S. jobs report could provide some relief for the rupee, a significant rally is unlikely without stronger equity inflows or favorable developments regarding U.S. trade tariffs. Indian exports to the United States currently face tariffs of up to 50%, which continue to weigh on currency sentiment.
Looking ahead, MUFG analysts expect the rupee could weaken to 89 against the dollar by the first quarter of 2026 if steep tariffs remain, though they may be reduced to 25% next year. Historical trends show that the rupee has remained under pressure whenever U.S. dollar strength coincided with trade uncertainties, while periods of eased tariffs or higher foreign investment have previously supported modest appreciation.
The recent weakness in Treasury yields, alongside near-certain expectations of a Fed rate cut, highlights a cautious but slightly supportive environment for the rupee. However, the combination of trade barriers and slower equity flows means that gains could be limited unless global trade and investment conditions improve.
Source- Reuters
5th Jun, 2025
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