Rupee rises more on retreating US yields, but analysts say rally unsustainable

By Nimesh Vora

MUMBAI (Reuters) – The Indian rupee marched to a three-week high on Thursday on a pullback in U.S. Treasury yields and the central bank’s resolve to defend the currency.

The rupee was at 82.5125 to the U.S. dollar by 11:20 a.m. IST, up from 82.6850 on Wednesday. The rupee earlier hit 82.3725, the highest in three weeks.

The rupee managed a recovery from last week’s low of 83.16, primarily on Reserve Bank of India’s intervention.

The Indian central bank has sold dollars, both in the onshore over-the-counter and the non-deliverable forwards. Further, on Wednesday, it directed some banks not to take fresh outright arbitrage NDF positions.

The RBI “has for this moment” succeeded in “nullifying” the rupee’s downward momentum, a forex trader at a private bank said. However, “it will take little” for the downtrend to resume and the odds are high that this rally in rupee will not last, the trader said.

“Note that Jackson Hole is right around the corner.”

Federal Reserve Chair Jerome Powell will be speaking at Jackson Hole on Friday. In the past, Powell’s comments at Jackson Hole have had a significant impact on markets.

“While it may be a technical breakdown (for USD/INR) pushed by RBI,” the question is whether it will sustain and what will happen if the 10-year U.S. bond yields continues to remain high and if Powell sounds hawkish in his speech, said Vikas Bajaj, head of currency derivatives at Kotak Securities.

The rupee and other Asian currencies on Thursday were helped by the fall in U.S. yields following weak data. U.S. business activity approached the stagnation point in August, with growth at its weakest since February and demand for new business in the service sector contracting.

The 10-year U.S. Treasury yield is now at 4.20%, about 16 bps off recent highs.

(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)