Rupee poised to weaken after Fed's favoured inflation measure rises

By Nimesh Vora

MUMBAI (Reuters) - The Indian rupee is likely to decline versus the dollar after one more measure of U.S. inflation topped forecasts, heightening concerns over how high the Federal Reserve will raise interest rates.

The non-deliverable forward indicates that the rupee will open at 82.85-82.90, compared with 82.75 in the previous session.

The dollar index and U.S. yields soared on Friday, while shares plunged on mounting worries over the inflation outlook. The dollar index rose above 105 to its highest in about seven weeks while the 2-year Treasury yield climbed to a level last seen in November.

Data released on Friday showed that the core U.S. personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, shot up 0.6% month-on-month in January, the largest increase since June 2022. That was thrice the pace in December and above 0.4% expected by economists polled by Reuters.

In the 12 months through January, the core PCE price index rose 4.7%, compared with 4.3% in the previous session.

Following the data, investors have fully priced in a 25 basis points Fed rate hike at each of the next two meetings. The probability of the Fed reverting to a 50 bps rate hike at the March meeting rose to more than 1-in-4. The chances of a 50 bps hike were less than 1% about a month back, according to the FedWatch Tool.

"The market’s consensus view that inflation would head lower through the year has clearly been challenged and this has seen a repricing in rates and bond yields," Chris Weston, head research at Pepperstone, said in a note.

Most Asian currencies and equities declined on Monday. The Korean won paced losses, at about 1% down.

It is "to be expected" that the rupee will not match the pace of the decline of its Asian peers, considering the support at 82.90-83 levels, a trader at a Mumbai-based bank said.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 82.99; onshore one-month forward premium at 13.5 paise ** USD/INR NSE March futures settled on Friday at 82.89 ** USD/INR March forward premium at 13.5 paise ** Dollar index down at 105.08 ** Brent crude futures up 0.1% at $83.3 per barrel ** Ten-year U.S. note yield at 3.94% ** SGX Nifty nearest-month futures down 0.1% at 17,529 ** As per NSDL data, foreign investors sold a net $120.7mln worth of Indian shares on Feb. 23

** NSDL data shows foreign investors bought a net $13mln worth of Indian bonds on Feb. 23

(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)