Rupee drops in line with Asian FX, corporate dollar demand seen

By Anushka Trivedi

MUMBAI (Reuters) - The Indian rupee weakened on Wednesday as sustained corporate demand pushed the U.S. dollar up, while weakness in Asian stocks and currencies spilled over to domestic markets.

The rupee declined 0.25% to 81.2975 per dollar. It has shed nearly a percent from its high of 80.51 on Monday, with volatility gripping markets this week.

There is a huge cash dollar demand in both the spot and forwards markets, a trader with a private said, adding that foreign banks are likely buying on behalf of their importer clients.

A decline in USD/INR forward premiums made it attractive for importers to hedge, leading to more dollar outflows. The cost of hedging 6-month dollar was down 25 basis points this week.

For the day, the dollar index slipped 0.3% after initial gains. U.S. President Joe Biden soothed nerves by saying the missile that caused an explosion in NATO-member nation Poland may not have been fired from Russia.

However, Asian stocks and currencies remained jittery, with the Chinese yuan and shares falling 0.5% each.

Concerns about rising COVID-19 cases in major cities Guangzhou, Beijing and Zhengzhou, fuelled worries about China's economic health.

Recent turbulence in the currency markets has also left investors guessing which way the rupee would go. But with a likely recession in developed markets hitting global trade, some reckon the greenback will rebound and pressure Asian currencies.

"We feel it may be premature to assume that the dollar rally has run out of steam and maintain our rupee projections of 83.50 and 84-85 by end of December and end of March, respectively", economists at Elara Capital wrote in a note.

"We do not see the Fed pivoting to a pause in the near term and expect the dollar rally to resume."

Elara's view comes on the back of India's trade deficit widening in October as imports outpaced exports yet again.

(Reporting by Anushka Trivedi in Mumbai; Editing by Dhanya Ann Thoppil)