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Rupee likely to rise after U.S. inflation data signals smaller Fed rate hikes

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MUMBAI — The Indian rupee is expected to open higher against the dollar on Wednesday, after U.S. inflation cooled further, reinforcing expectations that the Federal Reserve will shift to smaller sized interest rate hikes.

The rupee was seen opening around 82.64-82.68 per dollar, compared to 82.8050 in the previous session.

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The rupee will open higher, but will lag peers, a foreign exchange trader said. Persistent dollar demand from importers and related to the offshore market will limit the rupee’s advance, the trader added.

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The Reserve Bank of India (RBI) lifted the informal restrictions on rupee non-deliverable forward (NDF) trades it had placed on local banks in October, Reuters reported on Tuesday.

The dollar index and Treasury yields fell on Tuesday following the softer-than-expected U.S. inflation data. U.S. headline annual inflation rose less than expected for a second straight month in November, fueling hopes that the Fed will hike rates in smaller increments and causing speculation of a lower terminal rate.

Core CPI was below expectations with and the year-on-year rate falling to 6.0%.

Fed funds futures now expect U.S. rates to peak at just below 5% by around the middle of next year. A 50-basis points rate hike by the Fed during U.S. trading hours on Wed is all but assured.

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Investors will be eyeing the projections of Fed officials. Following the softer U.S. inflation data, Goldman Sachs said in a note that we now see the median funds rate for next year in the Fed Summary of Economic Projections a close call between 5-5.25% and a smaller rise to 4.75-5%.

China’s yuan was a bit weaker after Chinese leaders delayed a key economic policy meeting amid growing signs that coronavirus infections are surging in Beijing.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 82.72; onshore one-month forward premium at 12.75 paise ** USD/INR NSE December futures settled on Tuesday at 82.9050 ** USD/INR December forward premium at 5.5 paisa ** Dollar index at 104.06 ** Brent crude futures at $80.3 per barrel ** Ten-year U.S. note yield at 3.5% ** SGX Nifty nearest-month futures up 0.6% at 18,812 ** As per NSDL data, foreign investors bought a net $437.5 mln worth of Indian shares on Dec. 12 ** NSDL data shows foreign investors sold a net $28.8 mln worth of Indian bonds on Dec. 12 (Reporting by Anushka Trivedi in Mumbai; Editing by Rashmi Aich)

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