The Indian rupee (INR) might get a boost as the US Federal Reserve considers cutting rates.

What does this mean?

The Fed is leaning toward reducing interest rates due to slowing inflation and a cooling labor market. Current expectations are for a 25 to 50 basis points (bps) cut, with recent sentiment shifting towards a larger 50 bps reduction. This marks a pivot from the Fed's earlier cautious stance. The one-month non-deliverable forward (NDF) indicates a flat-to-slightly-higher opening for the rupee against the dollar, reflecting that despite recent stability, market participants are bracing for volatility.

As the Fed considers rate cuts, the USD/INR pair is expected to see heightened volatility. Currency traders are skeptical about the pair finding a new range soon. However, with the Fed's dovish turn, risks for the pair remain primarily on the downside. Investors are also watching other indicators: the US Dollar Index is down to 100.97, Brent crude futures have nudged up to $71.7 per barrel, and foreign investors recently bought $949.2 million in Indian shares.

The bigger picture: Global ripple effects.

A significant rate cut by the Fed could trigger broad movements in global markets. HSBC notes that a cautious Fed could see the USD recover, while a more proactive approach might keep it subdued. Key metrics to watch include the ten-year US Treasury yield at 3.66% and foreign investor activities in Indian markets, with recent substantial inflows into shares but outflows from bonds. The interplay of these factors underscores the potential for significant shifts in both the INR and broader market sentiment.