MUMBAI: The Indian rupee hovered at over three-week highs on Monday afternoon as the dollar kept struggling on anticipation the Federal Reserve will not deliver large rate hikes, with local sentiment also burnished by inflows into equity markets.

The partially convertible rupee was trading at 79.1225 against the dollar by 0725 GMT, its strongest since July 7 and higher than Friday’s close of 79.25.

Weakness in oil prices also propped up the rupee as bleak manufacturing data from China and Japan for the month of July clouded the outlook for fuel demand.

That worrying data weighed on risk sentiment across Asian equities, but Indian shares defied the mood by climbing 0.8% on the back of auto stocks hitting a record high ahead of monthly sales data for the sector.

Foreign investors returned to Indian equities in July, buying $618.05 million worth of shares, which marked the first monthly inflow of funds since September 2021, according to Refinitiv data.

Dollar sinks to 6-week low to yen on bets for less aggressive Fed

A weaker than expected GDP print-out of the United States on Thursday hinted the economy could slip into a recession, prompting investors to scale back their dollar positions as the Fed will likely raise rates at a slower pace.

US bond prices have rallied against this backdrop, with Indian government debt pretty much tracking its Western counterpart as yields on the benchmark bond dropped 9 basis points last week.

On the day, the yield on India’s 10-year paper was 7.2730% compared to Friday’s close of 7.3196%.