Rupee to weaken on bets of more Fed rate hikes, RBI in focus
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The Indian rupee is expected to decline against the dollar at open on Wednesday after the U.S. inflation reading underscored bets of more Federal Reserve rate hikes.
The non-deliverable forwards indicate that the rupee will open at around 82.85-82.90 to the dollar, compared with 82.7550 in the previous session.
The broad consensus suggests that the Reserve Bank of India will be there to protect the 82.90-83.00 level, turning the first half an hour after open critical, a trader at a Mumbai-based bank said. If public sector banks are not on the offer on USD/INR at open, there could be a quick move higher, the trader added.
U.S. headline consumer inflation index (CPI) rose 0.5% month-on-month in January and core inflation by 0.4%. While the month-on-month change in the headline and core inflation was in line with expectations, the annual rate was above estimates.
"The CPI release is a hiccup to the disinflationary theme that is playing out," DBS Research said in a note.
"While the month-on-month measures were in line with consensus, higher weight should be placed on the year-on-year figure (which faced less distortions from tweaks in seasonal adjustments)."
Interest rate futures have fully priced a 25 basis points hike by the Fed in March and are almost certain of one more in May. The Fed's terminal rate expectations reached to near 5.25%
Fed officials said on Tuesday the U.S. central bank will need to keep gradually raising interest rates to beat inflation and suggested sticky price pressures driven by an upbeat jobs market may push borrowing costs higher than they once thought.
The 2-year Treasury yield rose overnight to above 4.60%, the highest since November. Asian currencies and equities were broadly lower.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 83.00; onshore one-month forward premium at 11.50 paise
** USD/INR Feb futures settled on Tuesday at 82.83
** USD/INR Feb forward premium at 4.0 paise
** Dollar index up at 103.29
** Brent crude futures down 0.4% at $85.3 per barrel
** Ten-year U.S. note yield at 3.75%
** SGX Nifty nearest-month futures down 0.3% at 17,872
** As per NSDL data, foreign investors bought a net $181 mln worth of Indian shares on Feb. 13
** NSDL data shows foreign investors bought a net $91 mln worth of Indian bonds on Feb. 13
