MUMBAI, Feb 18 (Reuters) – The Indian rupee weakened slightly on Tuesday as the impact of weak regional currencies and heightened dollar demand – spurred by positions in the non-deliverable forwards market – was blunted by likely dollar-selling by the central bank.
The rupee was at 86.9550 against the U.S. dollar as of 10:50 a.m. IST, down from its close of 86.8775 in the previous session.
Heightened appetite for dollars at the daily reference rate weighed on the rupee, a trader at a foreign bank said.
The reference rate, or the daily fix, was last quoted at a 0.30/0.50 paisa premium, signalling strong dollar bids, per the trader.
However, state-run banks were spotted offering dollars in early trading near the 86.94-86.95 levels, most likely on behalf of the Reserve Bank of India, which capped the currency’s losses traders said.
Asian currencies weakened between 0.1% to 0.4% as the dollar index rose nearly 0.3% to 107, extending its recovery from a two-month low hit last week.
U.S. bond yields nudged higher as well, with the 10-year Treasury yield up four basis points at 4.51%. The 1-year U.S. Treasury yield also rose, hurting dollar-rupee forward premiums.
The dollar-rupee 1-year implied yield was last quoted lower by two bps at 2.11%, its lowest level in over two months.
Growing expectations that the Federal Reserve will keep policy rates on pause and that the RBI will deliver a cut at its April meeting are likely to weigh on far forwards, a swap dealer at a bank said.
“In the lead-up to the April meeting, expect the 1-year to touch its support level at 1.95%,” the dealer said.
Fed officials have also signalled caution about future rate cuts in recent remarks, with Fed Governor Michelle Bowman saying she wanted increased conviction that inflation will decline further this year before lowering interest rates again. (Reporting by Jaspreet Kalra; Editing by Janane Venkatraman)
