Rupee likely to open higher on dollar pullback; U.S. yields cap upside

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MUMBAI — The Indian rupee is tipped to open a tad higher against the U.S. currency on Tuesday, after the dollar index retreated ahead of a two-day Federal Reserve policy meeting.

The rupee is expected at around 79.66-79.68 per dollar in initial trades, up slightly from 79.77 in the previous session. The rupee has declined about 0.8% from near 79.10 over the last four sessions.

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The near-term direction for rupee, despite a likely higher opening, “looks weak,” but “overall momentum continues to be neutral,” a trader at a Mumbai-based bank said.

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“Rupee tracking offshore should do well at open, but another uptick in Treasury yields means not much will happen after that.”

The dollar index was a tad lower at 109.62 in Asia, weighed down by a slight improvement in risk appetite. Treasury yields continued to march up with the 10-year yield reaching its highest level in more than a decade. The two-year yield is within a few basis points of the key psychological 4% level. Investors are preparing for another super-sized rate increase by the Fed on Wednesday. A 75 basis points rate increase has been fully priced in and there is an outside chance of a 100 bps increase. Odds of a 100 bps increase have, however, come off from the peak of near 40% to less than 20%.

Fed Chair Jerome Powell’s speech following the rate decision and the U.S. central bank’s so-called “dot plot” about interest rates will be watched out keenly to gauge where interest rates are headed in the near future.

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Markets are worried that if rates are kept higher for longer, it would impact the economic outlook.

Risk appetite has wavered on concerns over the impact the Fed’s rate hike could have on the economy. The S&P 500 Index managed to inch higher overnight, halting a two-day slide. Asian shares advanced.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 79.88; onshore one-month forward premium at 19.5 paise ** USD/INR NSE Sept futures settled on Monday at 79.85 ** USD/INR forward premium for current month is 5.0 paise ** Dollar index up at 109.62 ** Brent crude futures up 0.1% at $92.1 per barrel ** Ten-year U.S. note yield at 3.48%, India 10-yr bond