Indian rupee slips as Asia FX rally cools; correlation with yuan tightens

MUMBAI: The Indian rupee edged lower on Tuesday as regional currencies took a breather following a drop in the offshore Chinese yuan, with traders citing routine dollar demand from oil companies and importers.

The rupee was down 0.4% at 84.55 against the U.S. dollar as of 11:20 a.m. IST. The dollar index was treading water below the 100 mark while the offshore Chinese yuan was lower by 0.2%.

The local currency’s 14-day correlation with the offshore Chinese yuan has risen to a near three-month peak as optimism about a softening of U.S. trade policies helped Asian currencies gain.

Elevated demand to buy dollars at the daily reference rate published by the Reserve Bank of India (RBI) also weighed on the rupee on Tuesday, traders said.

While a sharp rally in the local currency had pulled down the Chinese yuan-Indian rupee cross rate (CNY/INR) to a near 9-month low last week, it has since recovered with analysts pointing out that the RBI may remain wary of too much INR richness against the Chinese currency.

Indian rupee to slip at open on Chinese yuan-led Asia FX weakness

“We see near-term downside risk to USD/INR, but the RBI will be careful to not let the INR outperform significantly, especially against the CNY,” analysts at ANZ said in a note.

The RBI had likely intervened via state-run banks last week to put a lid on gains in the INR, traders said.

In the near-term, focus will remain on developments on the U.S. trade deals with different countries while investors will also keep an eye on the Federal Reserve’s policy decision due in U.S. market hours on Wednesday.

While the central bank is widely expected to keep rates unchanged, remarks from Chair Jerome Powell - and other policymakers later in the week - will be in focus for cues on the future bath of policy rates.