Rupee to gain momentum on drop in US yields

The rupee is poised to start the week on a stronger note, supported by a decline in US Treasury yields following statements from Federal Reserve Chair Jerome Powell. Additionally, the victory of India's ruling party in state elections is expected to contribute to the rupee's strength.

According to non-deliverable forwards, the rupee is anticipated to open at approximately 83.23-83.24 against the US dollar, compared to its previous close at 83.2875 on Friday. 

Analysts suggest that the favorable outcomes in state elections for Prime Minister Narendra Modi's Bharatiya Janata Party could lead to a higher opening for the rupee. However, some caution that dip-buying interest in USD/INR may emerge around the 83.20 level.

The election results are seen as positive for equity inflows, potentially easing some pressure on the Indian rupee in the short term, as noted by MUFG Bank in a Monday report.

The drop in US Treasury yields on Friday, driven by Powell's optimistic comments regarding the sufficiency of the current policy rate in addressing inflation, is also contributing to the rupee's expected strength. 

Powell said the Federal Open Market Committee's careful approach, given the balanced risks of under- and over-tightening.

US Treasury yields rebounded slightly in Asia after reaching a low of 4.19 per cent on Friday, the lowest since early September. 

Market expectations for a rate cut at the Fed's March meeting have increased to 60 per cent, up from 21 per cent a week ago, according to the CME's FedWatch tool.

Most Asian currencies experienced gains, and the dollar index showed a slight increase at 103.28. Throughout the week, investors will closely monitor US economic data for insights into Fed policy, while also awaiting the Reserve Bank of India's policy decision scheduled for Friday.

(With Reuters Inputs)