Rupee may struggle on uptick in US yields before Federal Reserve decision

The Indian rupee may weaken a tad on Wednesday, weighed down by the move higher on U.S. yields on the possibility of a hawkish Federal Reserve outcome.

Non-deliverable forwards indicate the rupee will open marginally lower to the U.S. dollar, compared with 81.87 on Tuesday.

The local currency managed to reach an over two-month high of 81.6650 on Tuesday, before the Reserve Bank of India likely stepped in, according to traders.

With any hopes of a larger rally on the rupee once again quashed by the RBI, the odds are that we see a return to the 82 handle, a fx salesperson at a bank said.

"Obviously what happens on the dollar and U.S. yields after the Fed is important, but I do not expect the impact (on the rupee) to last beyond a day."

The dollar index inched higher, Asian currencies dropped and the two-year U.S. yield reached 4.90% before the Fed's rate decision later on Wednesday. A 25 basis points rate hike is fully priced in.

What will draw attention is comments by Fed Chair Jerome Powell, considering that investors are more or less convinced that the July hike will be the last of the current cycle.

Softer inflation readings have prompted investors to bet that more rate hikes will not be required despite the last Fed dot plot indicating one more rate hike beyond July.

"Powell will probably argue in his press conference that further rate increases are still possible," Capital Economics said in a note.

"Nevertheless, we expect a run of more positive inflation data over the coming months to ensure that the July hike will mark the peak."