Rupee falls on dollar index's recovery, forward premiums at 2-wk high

Indian rupeeReuters

The Indian rupee declined against the U.S. currency on Thursday on the dollar's recovery against its major peers and weak Asian cues, and forward premiums rose to the highest level this month.

The rupee INR=IN last traded at 82.76 to the dollar, down from 82.46 in the previous session. Dollar sales by a large foreign bank had briefly lifted the local currency to near 82.40, according to traders.

The dollar index =USD climbed 0.6 per cent to 104.28, boosted by the U.S. Federal Reserve's interest rate forecasts and poor risk appetite. Futures pointed to losses for the S&P 500 Index, while European and Asian equities declined. Indian equities had their worst day since mid-October.

The Fed raised rates by 50 basis points (bps) to 4.25-4.5 per cent and the median dot showed rates would rise to 5.125 per cent at end-2023, up from 4.625 per cent in September.

The distribution of the 2023 dot plot was skewed to the upside with only two dots below 5.125 per cent and seven dots above it, Bank of America Merrill Lynch said in a note.

Market expectations, however, forecast that the Fed rate was likely to top out at around 4.75 per cent-5 per cent around mid-next year and would be followed by rate cuts.

The euro and the U.K. pound weakened against the dollar ahead of rate decisions from the European Central Bank and the Bank of England.

Meanwhile, the 1-year USD/INR forward premium INRANPRM1Y=RR reached 2 per cent for the first time this month. The 1-year premium had opened a tad lower but reversed course on paying interest (sell/buy swaps) from state-run banks, according to traders.

The 1-year implied yield is now well off the 1.60 per cent lows reached last week. Sell/buy swaps by banks on behalf of the Reserve Bank of India have pushed premiums higher, traders said.