Rupee expected to depreciate on worries over US Federal Reserve rate hikes

By Anushka Trivedi and Nimesh Vora

MUMBAI (Reuters) - The Indian rupee is expected to decline versus the dollar at open following an overnight jump in U.S. yields on bets of more rate hikes from the U.S. Federal Reserve.

The non-deliverable forwards indicate the rupee will open at around 82.85 to the U.S. dollar compared with 82.79 in the previous session.

The 10-year U.S. yield and the 2-year yield overnight rose to the highest since November. Futures are now pricing in a peak rate of 5.35%, which is more than 40 basis points (bps) higher than before the January U.S. jobs report released on Feb. 3.

The U.S. activity data released on Tuesday supported a further repricing higher of the peak rate. Business activity unexpectedly rebounded in February, reaching its highest level in eight months, according to a survey on Tuesday.

U.S rates continue to adjust higher with investors digesting the implications of firm economic data and the impact on the Fed's policy, DBS Group Research said in a note.

The jump in 10-year U.S. yields indicates the paring of bets that the Fed will cut rates this year and the drive higher in terminal rate estimates, it added.

U.S. equities overnight suffered their worst session in more than two months. The dollar index inched higher.

The dollar index remains around the 104 level, a surprise in the wake of the selloff in U.S. bonds and equities, a trader at a Mumbai-based bank said. That will be a bit of relief for the rupee; then there is the RBI to take into account, they added.

The Reserve Bank of India has likely been selling dollars, both onshore and offshore, to prevent the rupee from weakening below the 83-handle, according to several market participants.

Markets now await minutes of the Fed's Jan. 31-Feb. 1 meeting due during U.S. trading hours.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 82.96; onshore one-month forward premium at 12 paise

** USD/INR NSE Feb futures settled on Tuesday at 82.8250

** USD/INR Feb forward premium is 1.5 paise

** Dollar index little changed at 104.10

** Brent crude futures declines to $82.9 per barrel

** Ten-year U.S. note yield at 3.9320%

** SGX Nifty nearest-month futures down 0.4% at 17,766

** As per NSDL data, foreign investors bought a net $56.9 mln worth of Indian shares on Feb. 20

** NSDL data shows foreign investors sold a net $18.9 mln worth of Indian bonds on Feb. 20

 

(Reporting by Nimesh Vora; Editing by Janane Venkatraman)