Rupee clings to modest gains hemmed in by softer dollar, corporate hedging

Synopsis

The Indian rupee saw a slight gain on Friday, though it's set for a weekly dip. Despite a weaker dollar and positive Asian currency movements, corporate demand and hedging activities are capping the rupee's rise. Analysts suggest the Federal Reserve's reduced urgency for rate hikes offers some comfort. Meanwhile, foreign investors are boosting Indian bond purchases ahead of index inclusion, while equities followed regional trends.

The Indian rupee was a tad stronger on Friday but on course for a weekly decline as hedging demand and intermittent maturities of non-deliverable forward contracts blunted the boost from a broadly softer dollar.

The rupee was at 95.27, up 0.1% from its previous close ‌and tracking ⁠modest ⁠gains across most Asian currencies after softer-than-anticipated U.S. payroll growth data eased expectations of rate increases in the United States.

The dollar index eased 0.2% to 100.7, with traders in the interest rate futures market scaling back the odds of a Federal Reserve rate hike in September to about 50%.

"While Fed tightening is priced ⁠as a base ‌case, the urgency for tightening has diminished somewhat for the immediate term and should provide some comfort ⁠for sentiment," analysts at DBS said in a note.

Despite a pickup in foreign portfolio inflows into Indian government bonds and a broadly weaker greenback, the rupee has struggled to benefit in the face of corporate dollar demand and recurring expiries of NDF contracts, traders said.

"A move towards the 95.80-96 zone could spark a fresh bout of importer dollar ‌buying, but it's quite likely the central bank won't allow a swift fall either," a trader at a private bank said.

Elsewhere, Indian equities ⁠tracked regional stocks higher, while the yield on the 10-year government bond was little changed as traders awaited a hefty auction of the benchmark note.

Overseas investors have stepped up bond purchases in anticipation of an inclusion in the Bloomberg Global Aggregate Bond Index, buying nearly $500 million of debt in the first two days of July after a record $3.1 billion in June.

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