Rupee at risk of falling to record low on surging US yields

By Nimesh Vora

MUMBAI (Reuters) – The Indian rupee on Thursday is expected to open just shy of its record low in the wake of a further rise in U.S yields on bets that interest rates are likely to say higher for longer.

Non-deliverable forwards indicate the rupee will open at around 83.20-83.22 to the U.S. dollar compared with 82.95 in the previous session. The rupee’s record low is 83.29, reached in October 2022.

India forex and money markets were off on Tuesday and Wednesday. On both these days, the 1-month USD/INR NDF had climbed above 82.50, implying a spot rate that was higher than 83.29.

The Reserve Bank of India possibly intervened in offshore NDF to defend the rupee.

There was “a very high probability” that RBI would “make itself known” at open to keep rupee from making a lifetime low, a forex trader at a bank said.

A decline below 83.30 for the rupee “would trigger a new round” of dollar buying and “you can expect a sizeable move”, he said.

The 10-year U.S. yield on Wednesday closed at the highest level since 2008, lifting the dollar index to near 103.50. Resilient U.S. economic data and worries over supply have been among the reasons cited by analysts for the jump in U.S. yields.

The minutes of the U.S. Federal Reserve July meeting out Wednesday showed that policymakers remain highly attentive to inflation risk, providing another reason to investors to avoid U.S. bonds.

Most Fed officials “continued to see significant upside risks to inflation which could require further tightening of monetary policy”, the minutes showed.

“The Fed kept the door open for the second hike it pencilled in June at the remaining three meetings of 2023,” DBS Research said in a note.

Asian currencies extended losses. The offshore Chinese yuan dropped to almost 7.35 in Asia trading, the lowest since November 2022.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 83.28; onshore one-month forward premium at 8 paisa ** USD/INR NSE August futures settled at 83.1375 on Monday ** USD/INR August forward premium at 4.0 paise ** Dollar index up at 103.52 ** Brent crude futures up 0.2% at $83.6 per barrel ** Ten-year U.S. note yield at 4.29%

** As per NSDL data, foreign investors sold a net $306.2mln worth of Indian shares on Aug. 11

** NSDL data shows foreign investors bought a net $152.4mln worth of Indian bonds on Aug. 11

(Reporting by Nimesh Vora; Editing by Nivedita Bhattacharjee)