Rupee weighs dollar's 'decent' recovery, poor risk and flows

The Indian rupee will likely open little changed on Thursday, eyeing a further recovery on the U.S. dollar, more losses for equities and flows.

Non-deliverable forwards indicate the rupee will open nearly unchanged from 83.2750 in the previous session.

"2024 has began on a very different note for the dollar and for risk," a forex trader at a bank said. The dollar was "mounting a decent recovery" and should keep USD/INR buyers "interested", he said.

The portfolio inflows "will definitely not keep up the pace of December", making "surprising" dips on USD/INR "difficult", he added. The dollar index reached a more-than-two-week high in the New York session, helped by the weak risk appetite. U.S. equities retreated Wednesday to extend their losing run. The S&P 500 Index has dropped 1.8% over three days. The 10-year U.S. bond yield topped 4% before retreating.

Following the December rally, both U.S. bonds and equities have struggled. The move has come on the back on mild pullback in expectations around the Federal Reserve rate cuts.

Markets are pricing in a 29% chance that the Fed will hold the policy range of 5.25% to 5.5% at its March policy meeting, up from under 10% a week back, according to CME's FedWatch Tool.

Plus, investors are now pricing in total of less than 150 basis points of rate cuts this year.

FED MINUTES
The minutes of the December Fed meeting noted the progress on inflation and reinforced expectations the Fed policy rate had likely peaked.

Further, the minutes reflected on the risk of keeping the funds rate too high for too long, a point that Fed Chair Jerome Powell made at the December press conference.

Comments in the minutes on inflation progress to date and risks to growth from keeping rates too high were dovish, Goldman Sachs said in note.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 83.38; onshore one-month forward premium at 8.50 paise ** Dollar index up at 102.50 ** Brent crude futures up 0.2% at $78.4 per barrel ** Ten-year U.S. note yield at 3.93%

** As per NSDL data, foreign investors bought a net $191.4 mln worth of Indian shares on Jan. 2

** NSDL data shows foreign investors bought a net $114 mln worth of Indian bonds on Jan. 2