Rupee likely to weaken after Fed's Powell hints at higher peak rate

MUMBAI (Reuters) - The Indian rupee is tipped to decline against the dollar on Thursday, after U.S. Federal Reserve Chair Jerome Powell noted that interest rate hikes might have to rise more than what was previously expected.

The rupee is expected to open at around 82.85-82.90 to the dollar, compared with 82.7800 in the previous session.

"Based on the reaction of U.S. bond and equity markets to Powell's remarks, rupee, like the rest of Asia, will struggle at open," a trader at a Mumbai-based bank said.

However, with the pair (USD/INR) unlikely to climb above 83 at least in initial trades, it may be said "on balance that rupee will he happy with the outcome", the trader added.

The dollar index and Treasury yields rose overnight and U.S. equities tumbled after Powell cautioned that extensive uncertainty remained about how high rates need to go and that they could peak at higher levels than policymakers previously thought.

It was "very premature" to discuss when the Fed might pause its increases, Powell added.

His remarks prompted U.S. equities and bond yields to reverse course. U.S. equities had moved higher and bond yields had fallen prior to Powell's remarks, after the Fed signalled smaller rate increases in the future to assess the impact of its policy tightening on the economy.

The U.S. central bank raised rates by 75 basis points to 3.75-4%, along expected lines.

ING Bank pointed out that Powell highlighted an important distinction between the pace of rate hikes and what will be the ultimate, or terminal, rate level.

"Indeed, he commented that the Fed doesn't want to fail to tighten enough and loosen too soon," the bank said in a note.

Asian currencies were trading lower, but the losses were mostly moderate. The offshore Chinese yuan reversed most of its overnight decline. Asian shares were down up to 2.2%.

  KEY INDICATORS:

** One-month non-deliverable rupee forward at 83.10; onshore one-month forward premium at 20.00 paise

** USD/INR NSE Nov futures settled on Wednesday at 82.9325

** USD/INR Nov forward premium at 16.75 paise

** Dollar index at 111.85

** Brent crude futures down 0.4% at $95.8 per barrel

** Ten-year U.S. note yield at 4.12%

** SGX Nifty nearest-month futures down 1.0% at 17,990

** As per NSDL data, foreign investors bought a net $748.8 mln worth of Indian shares on Nov. 1    

** NSDL data shows foreign investors sold a net $11.1 mln worth of Indian bonds on Nov. 1

(Reporting by Nimesh Vora; Editing by Rashmi Aich)

By Anushka Trivedi and Nimesh Vora