Rupee firms as Asian currencies rebound; forward premiums jump

The Indian rupee strengthened on Wednesday, helped by an uptick in most Asian emerging market peers, while traders noted there were some dollar inflows.

The rupee USDINR finished the session at 81.24 per dollar, recovering from trading near its Tuesday's close of 81.76 for the better part of the session. It had declined 0.5% in the first two days of the week.

State-run banks sold dollars on the day, four traders said, but were unsure of the purpose. They also reckoned some bond-related inflows were trickling into the market.

Rupee forward premiums jumped, with 1-year implied yield (INRANPRM1Y=RR) at a two-month high of 2.35%, with traders again pointing to public sector bank action.

The 81.90-82 band acts as a resistance for the USD/INR pair and we would consider building short positions near that level, said Jigar Trivedi, senior research analyst, currencies and commodities at Reliance Securities.

Options market positioning earlier in the day also signalled a downside in the currency pair.

The dollar index DXY was 0.4% lower, reversing course from earlier in the session after the Bank of Japan maintained its ultra-loose monetary policy, surprising markets.

Asian emerging market currencies rebounded to trade higher, while equities remained buoyant.

India's budget presentation and the Federal Reserve's meeting on Feb. 1 are considered the next big trigger events.

The U.S. central bank's rate decision will be significant for currency markets, with participants expecting a smaller 25-basis-points hike and a terminal rate of around 5%.