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Rupee gains but lags behind Asian peers, forward premiums rise

A man counts Indian currency notes inside a shop in Mumbai

By Jaspreet Kalra

MUMBAI (Reuters) - The Indian rupee rose slightly on Thursday, aided by a drop in U.S. bond yields and a weaker dollar after soft U.S. inflation data boosted hopes that the Federal Reserve may begin easing policy rates from September.

The rupee was at 83.46 against the U.S. dollar as of 09:40 a.m. IST, up from its previous close at 83.50.

Asian currencies gained, with the Korean won up nearly 1.7% and leading gains, while the Thai baht also rose 1%. The dollar index was at 104.2 after declining 0.7% on Wednesday.

The U.S. consumer price index rose 0.3% in April, lower than the 0.4% increase anticipated by economists polled by Reuters. Meanwhile, retail sales were flat month-on-month, well below the consensus expectations of a 0.4% rise.

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The data prompted investors to raise the odds of a Fed rate cut in September to nearly 75%, up from 65% a day earlier, according to the CME's FedWatch tool.

However, Minneapolis Federal Reserve Bank President Neel Kashkari said on Wednesday the U.S. central bank should keep policy rates on hold "for a while longer until we figure out where underlying inflation is headed".

U.S. bond yields dropped with the 10-year Treasury yield declining to 4.31%, its lowest in more than a month.

The rupee "should strengthen a bit, but don't think the move would be very sharp as INR would continue to underperform in times of broad USD short positions buildup," a foreign exchange trader at a private bank said.

Dollar-rupee forward premiums ticked higher with the one-year implied yield up 2 basis points at 1.70%, lifted by lower U.S. bond yields.

The rupee is unlikely to see sharp gains till it holds below 83.30, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.

(Reporting by Jaspreet Kalra; Editing by Sohini Goswami)