Rupee expected to open steady ahead of US Fed decision

The Indian rupee is likely to open nearly unchanged on Tuesday, with traders expecting range-bound movement as they await the US Federal Reserve's policy decision later in the week. One-month non-deliverable forward contracts suggest that the rupee, INR=IN, will start trading at around 83.87-83.88 against the US dollar, indicating an almost flat change from its Monday closing rate of 83.8875.

Despite a rally in Asian currencies on the back of rising hopes that the US Federal Reserve may deliver a sizable cut on Wednesday, the rupee bucks the trend. Traders said absorption of foreign inflows by the Reserve Bank of India and persistent demand for dollars from local importers is supporting the stability of the rupee.

State-owned banks have been aggressively buying dollars at the 83.85 level, which may well be related to client flows. The mere continuous build-up in foreign exchange reserves in India, which reached an all-time high of $689.2 billion as of last Friday, reflects that the RBI has been absorbing dollars to adjust currency movements.

The dollar index was at 100.6, falling 0.4 per cent Monday after the probability of a 50-basis-point cut by the Fed surged to 67 per cent, from 50 per cent on Friday, based on CME's FedWatch tool. Declines in U.S. bond yields and advances in most Asian currencies, such as an 0.8 per cent gain in the Korean won, indicate these market trends.

MUFG Bank adds that 'US retail sales numbers later today' will also decide how the Fed cuts by 25 or 50 basis points and add to existing debates on the central bank's policy trajectory.

The rupee in the near term would be more or less flat on the back of market participants waiting for more news, but its movements would closely reflect the future Federal Reserve decision.