Indian rupee headed higher on weak dollar, fall in US yields; Fed awaited

A customer hands Indian currency notes to an attendant at a fuel station in Mumbai

By Nimesh Vora

MUMBAI (Reuters) - Indian rupee is expected to open higher on Wednesday, boosted by a broad decline on the U.S. dollar and plunge in yields amid worries over the U.S. banking sector.

Non-deliverable forwards indicate the rupee will open at around 81.76-81.80 to the dollar compared to 81.88 in the previous session.

The rupee reached 81.7225 on Tuesday, before dollar bids by public sector banks, probably for the Reserve Bank of India, prompted it to reverse course.

At present, the downside (on USD/INR) looks well protected at around the 81.60-81.70 level, a spot trader said.

"We will have to see if what the Fed does changes that. With what is happening with U.S. regional banks, we are more inclined to bet on a softer Fed tone and a weaker dollar."

The U.S. Federal Reserve will most likely raise rates by 25 basis points later in the day, interest rate futures indicate. Investors will be eyeing the U.S. central bank's forward guidance to assess the path ahead for interest rates.

While rate futures currently indicate an 88% probability of a rate hike, DBS Research reckons the odds of pause tonight are "non-negligible," more so if shares of U.S. banks "take another meaningful leg lower."

Shares of U.S. regional banks plunged overnight after the weekend failure of First Republic Bank.

"Investors could not shake off fears of a banking crisis after First Republic Bank became the third U.S. bank failure after Silicon Valley Bank and Signature Bank," DBS said.

U.S. equities declined more than 1% while yields tumbled. The 2-year U.S. yield dropped about 20 basis points to slip back below the 4% level.

The risk off did not help the dollar. The dollar index declined on Tuesday and extended losses in Asia.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 81.86; onshore one-month forward premium at 11 paisa ** USD/INR NSE May futures settled on Tuesday at 81.9625 ** USD/INR May forward premium is at 9.0 paisa ** Dollar index down at 101.72 ** Brent crude futures at $75.3 per barrel ** Ten-year U.S. note yield at 3.44% ** SGX Nifty nearest-month futures down 0.4% at 18,141 ** As per NSDL data, foreign investors bought a net $791 mln worth of Indian shares on April 28

** NSDL data shows foreign investors sold a net $34.7 mln worth of Indian bonds on April 28

(Reporting by Nimesh Vora; Editing by Varun H K)