Soft US inflation adds to RBI support in tentative Indian rupee recovery

MUMBAI: The Indian rupee is likely to hold on to central bank-led recovery on Friday, with softer U.S. inflation offering incremental support, although doubts over the data and potential dollar demand from corporates may cap upside.

The 1-month non-deliverable forward indicated the rupee will open slightly higher-to-flat versus the U.S. dollar, having settled at 90.24 on Thursday.

The rupee has rallied from around 91 per dollar to current levels, a move that began with heavy Reserve Bank of India intervention soon after the market opened on Wednesday.

Bankers said the central bank stepped in aggressively to disrupt the one-way depreciation pressure that had built up in the currency, triggering position unwinds.

“The RBI has, for now, broken the one-way (higher dollar/rupee) cycle. However, the recovery still looks tentative and more corrective than directional,” a senior FX trader at a private bank said.

He noted that economists are flagging concerns over the U.S. inflation data, which caps the spillover benefit for the rupee, adding that he expects substantial dollar-buying interest in the 90–90.20 area.

U.S. consumer prices rose 2.7% year-on-year in November, slowing from a 3.0% increase in the 12 months through September and undershooting expectations of 3.1% print.

Data collection for October was disrupted by the federal shutdown, preventing the publishing of month-to-month changes for November’s CPI - creating voids that economists said made the report less reliable than normal.

Economists at Morgan Stanley noted that the weakness in both goods and services could be partly due to methodological issues.

“If these technical factors are the main source of weakness, we could see a re-acceleration later,” it said in a note.

While the downside surprise supports the case for further Federal Reserve rate cuts, uncertainty over the data due to the shutdown are likely to limit its impact to an extent, ANZ Bank said in a note.