Rupee to fall as dollar, US yields rise on debt ceiling concerns

By Sethuraman N R and Nimesh Vora

MUMBAI (Reuters) – The Indian rupee is expected to decline on Thursday as worries over the U.S. debt ceiling boosted demand for the safe haven dollar and sent U.S. yields higher.

Non-deliverable forwards indicate the rupee, having seen a bit of relief in the last two days, will resume losses. The one-month NDF indicates that the rupee will open at 82.70-82.72 to the dollar compared with 82.66 in the previous session.

The dollar will “catch a bit of a bid” at open, but “it will have to do much more” to convince momentum chasers, a trader said.

Fitch put the United States’ “AAA” debt ratings on negative watch on Wednesday in a precursor to a possible downgrade should lawmakers fail to raise the amount.

The dollar index rose to 104 and the 2-year U.S. yield climbed to near 4.40%, both highest in more than two months. The shorter maturity part of the U.S. yield curve was the most impacted by the U.S. debt ceiling impasse.

The point of peak stress (related to the debt ceiling) is set at June 1 where the one-month Treasury bill is yielding nearly 7%, DBS Research said in a note, while T-bill rates, slightly further out, are near 5%.

Representatives of President Joe Biden and congressional Republicans ended another round of debt ceiling talks on Tuesday with no signs of progress as the deadline to raise the government’s borrowing limit or risk default ticked closer.

U.S. equities dropped overnight. Asian currencies fell with the offshore Chinese yuan dropping below 7.08 to the dollar.

Meanwhile, minutes of the U.S. Federal Reserve May meeting minutes revealed policymakers “generally agreed” that the need for further interest rate increases “had become less certain”. However, some cautioned that the U.S. central bank needed to keep its options open given the risks of persistent inflation.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 82.83; onshore one-month forward premium at 9 paise ** USD/INR NSE May futures settled on Wednesday at 82.70 ** Dollar index up at 103.99 ** Brent crude futures up 0.2% at $78.5 per barrel ** Ten-year U.S. note yield at 3.75% ** SGX Nifty nearest-month futures down 0.2% at 18,240 ** As per NSDL data, foreign investors bought a net $38.6mln worth of Indian shares on May. 23

** NSDL data shows foreign investors bought a net $15.5mln worth of Indian bonds on May. 23

(Reporting by Nimesh Vora; Editing by Sohini Goswami)