Rupee to fall on bets Fed to remain restrictive despite moderating inflation

By Nimesh Vora

MUMBAI (Reuters) – The Indian rupee will likely weaken on Friday on expectations that the U.S. Federal Reserve will keep interest rates high despite signs that price pressures are moderating.

Non-deliverable forwards (NDF) indicate the rupee will open at around 82.80 to the U.S. dollar, compared with 82.7125 in the previous session. Asian currencies were down while equities were mixed.

U.S. inflation data has not had “a major impact” on Asian currencies, and rupee speculators “will be in search of the next trigger”, a forex trader at a Mumbai-based bank said.

“To me, risks (on USD/INR) are on the upside, but it’s just too difficult to time it.”

U.S. equities rallied, the dollar index dropped and U.S. yields declined after data showed that headline and core inflation rose less than expected. The 1-month USD/INR NDF had dropped below 82.50.

However, the initial reaction faded on bets that while the Fed is unlikely to raise rates at the next meeting, worries that inflation could re-accelerate will make the U.S. central bank keep policy restrictive for longer.

San Francisco Fed President Mary Daly said that while recent inflation data is moving in the right direction, more progress is needed before she would feel comfortable that the Fed has done enough.

The S&P 500 Index was little changed, having rallied more than a percent. The dollar index, which dropped to 101.76 post the inflation data, was back near 102.50.

Investors are cautious that while the Fed will pause in September, rates “will remain restrictive for some time”, ANZ said in note.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 82.86; onshore one-month forward premium at 8 paisa ** USD/INR NSE August futures settled at 82.7025 on Thursday ** USD/INR August forward premium at 4.5 paisa ** Dollar index at 102.56 ** Brent crude futures down 0.1% at $86.3 per barrel ** Ten-year U.S. note yield at 4.12% ** As per NSDL data, foreign investors bought a net $120.4mln worth of Indian shares on Aug. 9

** NSDL data shows foreign investors bought a net $143.9mln worth of Indian bonds on Aug. 9

(Reporting by Nimesh Vora; Editing by Sonia Cheema)