Rupee has best session in a month, premiums rise ahead of Fed decision

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The Indian rupee posted its best performance against the dollar in over a month on Wednesday and forward premiums rose, after the U.S. inflation data supported the outlook that the Federal Reserve could take a less hawkish tone.

The rupee last traded at 82.46 per U.S. dollar, up from 82.8050 in the previous session. The local currency rose to near 82.40 during the session – its best since Nov. 11 – possibly helped by dollar inflows.

The flow was related to private equity investors purchasing a stake in a commercial bank, according to Anil Bhansali, head treasury at Finrex Treasury Advisors. On the Fed policy review, Bhansali said the focus will be on the language.

The larger-than-expected decline in the U.S. inflation rate boosted the rupee and its Asian peers. U.S consumer prices barely rose month-on-month in November, leading to the smallest annual increase in inflation in nearly a year.

The data supported bets that the Fed will temper the pace of rate hikes, prompting investors to lower their expectations on the terminal rate by about 20 basis points (bps).

The Fed is expected to scale back the size of its rate hike to 50 bps after four back-to-back 75 bps hikes. The decision is due during U.S. trading hours, at 00:30 IST.

The dollar index and Treasury yields fell, adding to Tuesday’s losses. The 2-year Treasury yield is now at 4.18%, 60 bps below year-to-date highs. The dollar index is now below 104, well off the 114.78 peak of this year.

Tracking the fall in Treasury yields, USD/INR forward premiums rose. The 1-year implied yield rose to near 1.94%, up about 35 bps over the last six sessions.