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Stability Marks Indian Rupee Amid Dollar Demand and Global Indicators

The Indian rupee fluctuated little on Tuesday, hampered by continuing dollar demand that limited prospective gains.

On Tuesday, the Indian rupee exhibited minimal changes, grappling with persistent dollar demand that constrained potential gains despite the dollar index hovering near a five-month low.

Exchange Rate and Regional Comparisons:

As of 8:20 am UAE time, the Indian rupee stood at 83.1650 against the US dollar (22.66 against the UAE dirham), showing marginal movement from its previous close at 83.14 (22.65) the preceding Friday. 

In contrast, several Asian currencies experienced gains ranging between 0.2% to 0.5%.

The dollar index, maintaining stability at 101.6 during Asian trading hours, had dipped to its lowest since late July last Friday. The soft US inflation data contributed to this trend, setting the stage for fluctuations in global currencies.

Rupee’s Outlook and Analyst Predictions:

While optimism favors the Indian rupee, analysts, such as Dilip Parmar from HDFC Securities, anticipate that substantial gains may be elusive. The currency will fluctuate from 83.05 to 83.25 (22.63-22.68) in Tuesday’s trading session.

US Inflation Data and Federal Reserve Implications:

The recent US inflation data, particularly the Core Personal Consumption Expenditure (PCE) inflation, influences the Federal Reserve’s stance. 

The PCE inflation, rising 0.1% month-on-month in November, fell short of the 0.2% expectation. The core PCE price index also showed a 3.2% year-on-year increase in November, the smallest since April 2021.

Investors are interpreting the data as supportive of potential Federal Reserve policy rate adjustments, with a near 90% probability of a rate cut at the March meeting, according to CME Group’s FedWatch tool. 

Consequently, rupee forward premiums have seen an uptick, with the one-year implied yield rising by 2 basis points to 1.77%.

Forward Premiums and Future Trends:

The trajectory of forward premiums is expected to continue its upward movement in the short term, driven by the prevailing “paying bias,” even as the Reserve Bank of India is expected to maintain an extended pause in its policy stance.

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