Rupee expected to underperform regional peers amid dollar's slide

The Indian rupee is expected to inch higher on Tuesday after the dollar index slumped to its lowest level in seven months, but is likely to underperform its regional peers.

The 1-month non-deliverable forward indicates that the rupee will open at 83.85 to the US dollar, compared to its previous close of 83.87.

The dollar index dropped to 101.76 in Asian hours, the lowest in more than seven months. Asian currencies, meanwhile, added to Monday's advance, with most up between 0.3 per cent to 0.5 per cent.

The situation has reversed from a few days ago when Asian currencies were broadly struggling, a currency trader said. At that time, the Reserve Bank of India "heavy intervention" made sure rupee did not weaken past 84.

"Now it is to be expected that rupee will not participate much to the dollar's decline, definitely not to the extent other Asians will."

The Reserve Bank of India has in recent days been selling dollars at 83.97 to support the rupee, according to traders.

One of the impacts of RBI's "incessant intervention" over the last several months has been that rupee will underperform when dollar declines and will outperform when dollar rallies, a treasure official at a bank said.

Fed rate cuts

The dollar's drop has been attributed by analysts to expectations around Federal Reserve rate cuts. The Fed is expected to cut rates by 100 basis points this year, beginning in September.

The upbeat risk mood has been another factor cited for the slump in the safe haven dollar.

Investors are eyeing Fed Chair Jerome Powell's comments on Friday at Jackson Hole. Expectations are for Powell to acknowledge the case for a rate cut.

The current dollar weakness may be a prelude to this week's Jackson Hole speech by Chair Powell, ING Bank said in a note.