India rupee sees biggest daily fall in over 2 months on hawkish Fed

MUMBAI: The Indian rupee saw its biggest single-day fall in more than two months on Thursday while bond yields rose as the U.S. Federal Reserve stunned investors by signalling it might raise interest rates as early as 2023, faster than assumed.

The partially convertible rupee ended at 74.0775 per dollar, down 1% compared with its close of 73.3225, after touching 74.08, its lowest since May 3.

India's benchmark 10-year bond yield closed down 3 basis points at 6.02% but most other bond yields rose 3-4 basis points tracking the U.S. benchmark bond yield which jumped 7.5 basis points.

"Forward guidance from the Fed proved to be more hawkish than what the market expected," Eugene Leow, strategist at DBS wrote in a note.

Traders said the surge in the dollar index to two-month highs following the Fed's comments on possible rate increases and a significantly higher inflation projection weighed on sentiment for all Asian currencies.

Long bets on most of Asia's emerging currencies were trimmed, a Reuters poll showed on Thursday, as investors weigh the prospect of tighter monetary settings as the U.S. recovery outperforms, while the COVID-19 situation locally is brought under control.

Traders however believe that central bank intervention will likely stabilise the rupee in the short-term but it would also depend on how things pan out globally.

"Given the strength in the dollar, it is likely that the USD/INR could now move into a new trading range," HDFC Bank economists wrote in a note.

"However, given the volatility in the market, that usually follows such events (Fed policy), we are holding off on changing our near-term call before the market digests the news and recent dollar moves show some resilience," they said.

RBI bought 400 rupees worth bonds and state loans in its third tranche of bond purchases under the government securities acquisition programme, a form of quantitative easing, and set a cut off of 5.99% on the benchmark 10-year paper.

"The RBI has nearly 75% of the benchmark bond stock with them now and with the cut-off they have shown yet again that they want the 10-year yield to stay below 6%," a senior trader at a foreign bank said.