Rupee Faces Dual CPI Test as US PPI Data Bolsters Rate Hike Bets

The Indian rupee has fallen for four consecutive days, reaching around 95.70 against the US dollar. This decline comes as the US Producer Price Index (PPI) released on Thursday exceeded expectations, with overall producer inflation rising 5.4% year over year, above the expected 5.3%. The robust PPI data directly bolstered expectations for a Federal Reserve rate hike.

The probability of the Federal Reserve raising interest rates at its policy meeting next week has risen from 61.2% before the data release to 72.4%, according to the CME FedWatch tool. This increase in rate hike bets has pushed US Treasury yields higher, with the yield on the 10-year U.S. Treasury note reaching 4.98%, its highest level since November 2023.

Investors are now awaiting the US August CPI report, scheduled for release tonight at 8:30 p.m. Beijing time. Economists forecast that US price pressures will ease only modestly in August, with core CPI expected to rise 2.3% year over year, down 10 basis points from July.

However, the institution cautions that its forecast faces upside risks, as it assumes substantial price declines across several tariff-sensitive product categories; should these declines fail to materialize, actual data could exceed expectations.