Indian rupee may struggle on rising likelihood of Fed rate hike

By Sethuraman N R and Nimesh Vora

MUMBAI (Reuters) - The Indian rupee may come under pressure on Monday, after a tentative deal to raise the U.S. debt ceiling made it likely that the U.S. Federal Reserve will raise rates next month.

Non-deliverable forwards indicate the rupee will slightly lower from the previous session's level of 82.575 per U.S. dollar.

Odds of a 25 basis points Fed rate hike at the June 13-14 meeting climbed to 2-in-3 after President Joe Biden on Sunday finalised a budget agreement with House Speaker Kevin McCarthy to suspend the existing debt ceiling until Jan. 1, 2025, and said the deal was ready to move to Congress for a vote.

Asian currencies were mostly lower while equities rose. U.S. equity futures extended Friday's rally.

Rupee on Friday managed a recovery on back of position adjustments and inability of USD/INR to move convincingly above 82.80, traders said. Portfolio inflows on the equity side have been robust, helping the rupee.

The rupee has a bit of momentum heading into the week, but with Fed rate cuts this year priced out and a hike now likely next week, downside for USD/INR looks limited from here, a trader said.

"Another thing is that I expect importers to be quite active," he said.

Meanwhile, U.S. data out on Friday supported the need for more monetary tightening.

U.S. consumer spending increased more than expected in April and inflation picked up, increasing chances of a Fed rate hike in June.

Yields of U.S. Treasuries jumped on the back of the data, with the two-year yield, which reflects near-term interest rate expectations, climbing to 4.64%.

"Despite all the uncertainty, U.S. economic activity is continuing to hold up well," ANZ said in a note.

"We think that if a debt ceiling agreement is reached, the Fed will need to tighten further."

KEY INDICATORS:

** One-month non-deliverable rupee forward at 82.68; onshore one-month forward premium at 9 paisa ** USD/INR NSE May futures settled on Friday at 82.6075 ** Dollar index at 104.14 ** Brent crude futures up 1% at $77.7 per barrel ** Ten-year U.S. note yield at 3.81% ** SGX Nifty nearest-month futures up 0.9% at 18,720 ** As per NSDL data, foreign investors bought a net $303.5 mln worth of Indian shares on May 25 ** NSDL data shows foreign investors bought a net $138.6 mln worth of Indian bonds on May 25

(Reporting by Sethuraman NR in Mumbai; Editing by Varun H K)