Rupee may fall to near 81 per dollar on surging U.S. yields, importer hedging

By Nimesh Vora

MUMBAI (Reuters) - The Indian rupee is tipped to extend its decline to a new record low on Friday, on the back of Treasury yields climbing to fresh multi-year highs and dollar demand from importers.

The rupee is expected to open at around 81 per U.S. dollar, down from 80.86 in the previous session.

On Thursday, the local unit had suffered its biggest single session percentage decline since February, due to lack of aggressive intervention by the Reserve Bank of India (RBI) and a very U.S. hawkish Federal Reserve rate outlook, traders said.

In the last hour of trade on Thursday, the local unit had accelerated its decline and closed at the day's low.

"Just based on yesterday's momentum, the pair (USD/INR) will get to 81 in early trades," a currency spot dealer at a Mumbai-based bank said.

"You can expect more importer activity today, and speculators will once again test the RBI."

The rupee, after a period of outperformance, was among the biggest losers among Asian peers on Thursday.

The 10-year U.S. Treasury yield overnight climbed above 3.70% and the two-year yield reached a high of 4.16%.

The latest sell-off in the bond market was fuelled by the so-called dot-plot projections from Fed officials that rates may reach 4.4% by the end of this year.

This implies more rate hikes of about 125 basis points over the remaining two meetings in 2022.

U.S. equities declined overnight, with S&P 500 Index falling to its lowest level in over two months.

The U.S. benchmark gauge is down about 21% year-to-date. In contrast, Indian equities were a tad higher for the year.

The fall in rupee premiums to the lowest level in over ten years is expected to aid importers to a small extent, traders said.

The 1-year rupee forward premium implied yield on Thursday dropped to below 2.75%.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 81.26; onshore one-month forward premium at 21 paise

** USD/INR NSE September futures closed on Thursday at 80.9425

** USD/INR forward premium for end current month is 1.5 paise

** Dollar index up at 111.3

** Brent crude futures down 0.3% at $90.2 per barrel

** Ten-year U.S. note yield at 3.72%

** SGX Nifty nearest-month futures down 0.5% at 17,547

** As per NSDL data, foreign investors sold a net $34.8mln worth of Indian shares on Sep. 21

** NSDL data shows foreign investors sold a net $132.4mln worth of Indian bonds on Sep. 21

(Reporting by Nimesh Vora; Editing by Neha Arora)