Rupee set for continued rally on speculative trading, debt inflows

The rupee is set to open higher on Monday, propelled by speculative trading and an influx of debt inflows, according to market analysts.

Projections from non-deliverable forwards indicate that the rupee will commence trading at approximately 82.82-82.84 against the US dollar, a slight shift from its previous close at 82.9225.

Marking an impressive eight-day winning streak, the rupee has undergone a nearly uninterrupted rally since 83.35, reaching its highest level since late September on Friday. The descent of USD/INR below 83 and its sustained position there are considered significant, potentially motivating new short positions while existing positions remain patient, notes a forex trader. The presence of External Commercial Borrowing (ECB) flows is also believed to contribute to the downward pressure on USD/INR.

The rupee's opening is expected to find support in the backdrop of a further decline in US Treasury yields, fuelled by data revealing an unexpected fall in US producer prices in December. This has heightened expectations of a Federal Reserve rate cut in March, with the odds now standing at nearly 80 per cent. The 2-year Treasury yield experienced a 25 basis points drop last week.

Market focus this week will be on the speech by Federal Reserve Governor Christopher Waller on Tuesday, following his role in initiating the rally in US Treasuries in late November, defining a timeline and a path for rate cuts, thereby setting the stage for the year-end risk rally.

Simultaneously, India's annual inflation rate for December came in below expectations, reinforcing the anticipation that the Reserve Bank of India will shift its stance to "neutral" in the next quarter.

Key indicators include a one-month non-deliverable rupee forward at 82.92 and an onshore one-month forward premium at 9 paisa. The dollar index stands at 102.33, Brent crude futures are up 0.2 per cent at $78.5 per barrel, and the ten-year US note yield is at 3.94 per cent. Notably, foreign investors sold a net $93.5 million worth of Indian shares on January 11, while data from NSDL shows foreign investors bought a net $108.9 million worth of Indian bonds on the same day. Stay tuned for further updates as the currency markets unfold.

(With Reuters inputs)