Rupee finds relief as U.S. yields, dollar take a breather

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

By Anushka Trivedi

MUMBAI (Reuters) - The Indian rupee strengthened on Thursday, as the Bank of England's decision to buy long-dated bonds prompted a retreat in U.S. yields and the dollar, though investors remained cautious amid the relief rally.

The rupee was up 0.3% to 81.6950 by 0451 GMT, having firmed up to 81.5875. The currency hit a record low of 81.95 on Wednesday and had declined nearly 3% over the past six sessions despite the Reserve Bank of India's support.

Asian stocks jumped after the dollar index dropped 1.3% and U.S. yields declined 30 basis points overnight. The BoE said on Wednesday it would buy as much government debt as needed after UK government's tax cutting plans triggered financial chaos.

Investors, however, were wary of how long this period of calmness would last as the U.S. Federal Reserve looks set to keep rates higher for longer.

"Broadly, rupee is expected to remain under pressure and we will head towards 82 (per dollar) eventually," said Sajal Gupta, head of forex and rates at Edelweiss Securities.

India's large trade deficit is a key concern and can drag on the rupee even if it relatively outperforms its Asian counterparts, he added.

Meanwhile, Dhiraj Nim, an economist and strategist with ANZ Research, highlighted the risks from high inflation. "Concerns of imported inflation from commodity prices remain contained even with a weaker rupee," he said in a report.

Comments on inflation will be followed keenly at the RBI's monetary policy committee decision on Friday. Since the last policy meet, retail inflation has come above 7% again, missing the RBI's target band for eighth month in a row.

Moreover, expectations of a 50-basis point hike have grown due to the pressure on rupee from large U.S. rate hikes.

(This story corrects rupee's session high in the second paragraph to 81.5875 from 79.5875).

(Reporting by Anushka Trivedi in Mumbai; Editing by Savio D'Souza)