Rupee reverses gains as SVB turmoil hits risk appetite, premiums up

A man counts Indian currency notes inside a shop in Mumbai

By Anushka Trivedi

MUMBAI (Reuters) - The Indian rupee declined on Monday, paring back earlier advances as weak risk sentiment owing to a U.S. lender's collapse saw equities fall and the dollar index recover.

The rupee ended at 82.1225 per dollar, having firmed up to 81.76 in initial trades. The currency closed at 82.04 on Friday.

The rupee, along with Asian currencies, had risen earlier on bets of a less aggressive Federal Reserve in light of the Silicon Valley Bank's (SVB) collapse.

However, the dollar index later recovered some lost ground to trade above 104 levels, while global equities tumbled, with Indian shares reversing earlier gains to fall 1.5%.

"While U.S. regulators have taken swift action to close the (SVB) bank and protect depositors, the fear is that there may be more casualties ahead as the Fed is not yet done with interest rate hikes," said Jayaram Krishnamurthy, founding partner & COO at Almus Risk Consulting.

These worries will keep risk sentiment in check and make emerging market currencies vulnerable, with near-term inflows likely affected, he added.

U.S. yields tumbled on Monday, with two-year down 30 basis points (bps) to 4.2781% and the 10-year down 13 bps to 3.5543% as bets of a half a percentage point rate hike from the Fed faded. [US/]

Futures are now pricing in a 25 bps hike at the U.S. central bank's March 21-22 meeting, after the probability of a 50 bps hike had jumped last week on Fed chair Jerome Powell's hawkish comments.

Fed rate is seen peaking at just under 5%.

As the banking crisis unfolds, Goldman Sachs analysts predicted the Fed would not raise rates next week at all.

The rupee forward premiums jumped tracking a fall in U.S. yields. The 1-year implied yield surged 15 bps to 2.30%, its highest since Feb. 2.

(Reporting by Anushka Trivedi; Editing by Sohini Goswami)