• The Indian rupee is expected to gain momentum due to a potential 50-basis-point rate cut by the U.S. Federal Reserve.
• The Fed's decision could cause volatility in global markets, including the Indian currency market.
• The size of the rate cut is uncertain, with possibilities of either a 25 or 50 basis point cut.
• The performance of the rupee will be heavily influenced by the Fed's decision, suggesting a potentially volatile week ahead.

The Indian rupee is set to gain momentum on Monday, propelled by the rising likelihood of a significant 50-basis-point rate cut by the U.S. Federal Reserve in the imminent week. This anticipated move by the Fed is projected to have a substantial impact on global markets, including the Indian currency market.

The 1-month non-deliverable forward, a crucial indicator of the rupee's future performance, suggests that the rupee will open flat-to-slightly-higher against the U.S. dollar, from 83.8875 in the previous session. For over a month, the rupee has been confined within a narrow 2 paisa range, demonstrating a relative stability in its value.

Fed's Decision and Market Volatility

A currency trader at a bank, speaking on condition of anonymity, highlighted the potential volatility in the world markets due to the uncertainty surrounding the Fed's decision. The significant uncertainty on what the Fed will do makes this week a potentially volatile one, he said. However, he expressed skepticism about whether this would lead to a new range for the dollar/rupee pair. "Will that translate to (dollar/rupee) making a new range? I doubt that," he added. The trader further noted that the risks on the dollar/rupee pair are on the downside, given the way the Fed expectations are shaping up leading into the decision.

The Fed is widely expected to initiate its rate cut cycle on Wednesday, in response to slowing inflation and a cooling off in the labour market. The key question, however, is whether the Fed will cut rates by 25 basis points or 50 basis points.

The odds of the size of the rate cut have seen considerable fluctuations. Following the release of the U.S. non-farm payrolls data and the inflation report, investors had almost ruled out a 50 bps cut. However, subsequent media reports suggesting that Fed officials were contemplating a 50 bps cut have prompted investors to reassess their expectations. As a result, the probability of a 50 bps cut is now higher than that of a 25 bps cut.

HSBC's Take and Key Indicators

HSBC Bank, in a note, pointed out the arguments for and against the Fed being more proactive. There are good arguments for and against the Fed being more proactive, the bank said. It further noted that the Fed's decision would have clear implications for the broad USD. It should be clear what the Fed's decision means for the broad USD, HSBC said. If the Fed adopts a cautious approach towards cuts, the USD is likely to recover, it added.

Other key indicators affecting the rupee include the dollar index, which is down at 100.97, Brent crude futures, which are up 0.2% at $71.7 per barrel, and the ten-year U.S. note yield, which stands at 3.66%. According to data from the National Securities Depository Limited (NSDL), foreign investors bought a net $949.2 million worth of Indian shares on September 12, but sold a net $71.4 million worth of Indian bonds on the same day.

Historical Impact of Fed's Decisions

Historically, the Fed's decisions on interest rates have had a significant impact on global markets, including emerging markets like India. For instance, in 2013, the announcement of the tapering of the Fed's quantitative easing program led to a sharp depreciation in the value of the rupee. This event, known as the 'taper tantrum', serves as a reminder of the potential volatility that can be triggered by changes in U.S. monetary policy.