INDIA RUPEE-Rupee treads water; forward premiums extend rally on RBI swaps, stop-losses

By Jaspreet Kalra

MUMBAI, Sept 25(Reuters) - The Indian rupee was little changed on Friday and on course for a muted weekly close, hemmed in by likely central bank intervention on one side and pressure from volatile oil prices and surging global yields on the other.

Dollar-rupee forward premiums, meanwhile, extended their rally on the back of sell/buy swaps conducted by a state-run bank, most likely on behalf of the Reserve Bank of India.

The rupee was nearly flat at 95.90 per dollar while the 1-year dollar rupee implied yield was at 3.5%, up 35 basis points over the last three trading sessions.

The return of oil above $100 a barrel has stoked worries over inflation fears, bolstering bets on global rate hikes, including by the Federal Reserve. The rising wagers have put the dollar on track for a weekly gain while lifting US Treasury yields to multi-year peaks.

Traders have also added to wagers on hikes by the RBI, helping propel forward premiums higher after the sell-buy swaps and cutting of trading positions ignited a rally earlier in the week.

"Rising core inflation, modest broadening of price pressures, low real rates, and global tightening all tilt the balance toward a hike, with oil above the RBI's assumptions likely the key swing factor," Apoorva Javadekar, chief economist at Shriram Group, said in a note. "Yet the case for an extended tightening cycle is weak."

Interest rate swap markets are currently pricing in about 90 basis points worth of rate hikes over the next 12 months.

Elsewhere, Asian currencies were trading mixed while regional shares held their nerve in the face of rising bond yields which threaten lofty equity valuations, especially in stocks linked to the artificial intelligence sector.