InvestorQ : Does the Federal Reserve meet have an impact on the rupee and why is that so?
shrinidhi Rajan made post

Does the Federal Reserve meet have an impact on the rupee and why is that so?

Answer
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Riya Dwivedi answered.
2 years ago


If you have ever wondered why currency traders follow the Fed minutes so closely, here is why they do it. The Fed monetary stance virtually sets the tone for the future direction and trajectory of Fed rates. The Fed rates are the basis on which US bond yields get determined. Higher Fed rates mean higher yields on US bonds. For global investors who are looking at a risk-off strategy to make money, this is a great opportunity. When they can earn higher returns investing in safe US bonds, why should they risk by going down the rating curve? When the Fed increases rates the dollar strengthens and that leads to a consequent weakening of the INR. The Fed monetary stance is not only important from the point of view of rates but also from the point of view of the tapering of the bond portfolio. What exactly is this bond portfolio?

When the US economy got into a financial crisis in 2008, the US Fed decided to support the markets by buying up bonds and infusing liquidity in return. This led to the Fed bond portfolio growing from $1 trillion to $4.5 trillion in the 8 years since the crisis. This bond portfolio is likely to be unwound from September 2017 onwards. When the bond portfolio is unwound, it will lead to a hardening of yields in the US bond market and a strengthening of the dollar. That leads to a consequent weakening of the rupee. In fact, one of the key reasons, the INR has strengthened since January 2017 has more to do with the weakening of the dollar index.