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Bets of larger Fed rate hike to weaken rupee at open

FILE PHOTO: Illustration photo of an India Rupee note

By Anushka Trivedi and Nimesh Vora

MUMBAI (Reuters) - The Indian rupee is expected to decline against the U.S. dollar on Wednesday after Federal Reserve Chair Jerome Powell opened the door for a 50 basis point (bps) hike at this month's meeting.

The non-deliverable forwards indicate the rupee will open at around 82.05-82.10 to the U.S. dollar compared with 81.91 in the previous session.

The Fed will likely need to raise interest rates more than expected in response to recent data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Powell told U.S. lawmakers on Tuesday.

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These were Powell's first comments following the higher-than-expected U.S. January inflation data.

He seemed to acknowledge that "disinflationary process" he spoke of repeatedly in a Feb. 1 news conference was not unfolding smoothly.

"Powell’s semi-annual testimony has certainly taken a more hawkish tone relative to his last major comments in February," ING Bank said in a note. His testimony shows that opinion has shifted again and "hawkishness was back in fashion".

Powell's comments pushed up the probability of a half a percentage point hike at the upcoming March meeting to 72%. This was near to 30% before his speech and about 10% a month ago, according to the CME FedWatch Tool.

The Fed peak rate expectations rose to 5.64%.

With Powell saying that the Fed's next step will depend on data, the U.S. jobs report due this Friday and the inflation report due next Tuesday will draw extra scrutiny, analysts said.

U.S. equities declined overnight, the dollar rallied against its major peers and near-maturity Treasury yields jumped. The 2-year U.S. yield reached above 5%.

Asian currencies and shares were trading lower.

The rupee has "a difficult" day ahead, but near-term momentum suggests that it will receive support below 82, at least in the first half of the session, a trader at a Mumbai-based bank said.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 82.25; onshore one-month forward premium at 16.50 paise

** USD/INR NSE March futures settled on Monday at 82.0250

** USD/INR March forward premium at 8.5 paise

** Dollar index rises to 105.74, highest level since Dec

** Brent crude futures at $83.4 per barrel

** Ten-year U.S. note yield rises to 4%

** SGX Nifty nearest-month futures down 0.7% at 17,725

** As per NSDL data, foreign investors bought a net $28.8 mln worth of Indian shares on Mar. 3

** NSDL data shows foreign investors sold a net $122.4 mln worth of Indian bonds on Mar. 3

(Reporting by Nimesh Vora; Editing by Janane Venkatraman)