Rupee rally to hit speed bump on weak Asian cues, tepid equity flows
The Indian rupee's rally to a three-week high is at risk of stalling on Wednesday, pressured by a decline in Asian currencies and lacklustre equity flows.
The 1-month non-deliverable forward indicated the rupee will open in the 87.10-87.14 range versus the U.S. dollar, compared with 86.95 on Tuesday, when it hit a three-week high of 86.92.
Unwinding of long-dollar positions, Prime Minister Narendra Modi's planned tax cuts and cautious optimism on the Ukraine-Russia front drove the rupee to its best day in seven weeks on Tuesday.
The "washout" of dollar longs has left positioning much lighter, and it won’t be a driver for the rupee anymore, a trader at a Mumbai-based bank said.
"And without a pickup in equity flows, it’s hard to see the currency holding near 87."
While Indian equities have rallied on hopes that Modi’s planned tax cuts will bolster growth, foreign flows remain tepid. Overseas investors were net sellers of local shares on Tuesday after putting in just over $100 million the previous day.
ASIA FX DOWN, RISK SOURS
Asian currencies slipped between 0.1% and 0.5% on the day, while the dollar index inched up to 98.40. Regional equities were mostly lower, tracking the tech-led selloff on Wall Street.
U.S. Treasury yields, meanwhile, fell on Tuesday after S&P affirmed the U.S. credit rating.
Much of attention was on a meeting between U.S. President Donald Trump, Ukrainian President Volodymyr Zelenskiy and European allies over the Russia-Ukraine war.
Focus now shifts to Federal Reserve Chair Jerome Powell’s speech on Friday, with markets watching for any pushback against expectations of a September rate cut.
Traders are largely confident a cut is coming, with futures pricing in a more than 80% chance.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 87.23; onshore one-month forward premium at 12 paise ** Dollar index up at 98.42
** Brent crude futures up 0.1% at $65.9 per barrel
** Ten-year U.S. note yield at 4.31%
** As per NSDL data, foreign investors bought a net $116.2 million worth of Indian shares on Aug. 18
** NSDL data shows foreign investors sold a net $12.7 million worth of Indian bonds on Aug. 18
