The rupee on Monday hit 81.6350 to the dollar, its highest level in more than a month. It has managed a near 1% rally over two sessions and it has held up well to the ongoing reassessment of the Fed's rate view.
The local unit's resilience will face "a stiff test from a volatile macro environment," ANZ's Nitin Agarwal said in an interview with Reuters.
"Given the kind of monetary landscape that's evolving globally, I don't see the dark clouds lifting anytime soon over emerging market currencies in general," Agarwal said
The rupee might be better placed due to the Reserve Bank of India's vast forex reserves, "still it is an emerging market currency," and will have "a battle to fight in the current U.S. monetary policy backdrop."
The expectations around the peak Fed Fund Rate have changed since the January U.S. jobs report. Investors are now looking at a peak rate of just under 5.50% and have almost priced out rate cuts this year.
The dollar index has managed to recover to 104.50 from near 101 on the back of this repricing.
It has been a "welcome change" that the rupee has managed to appreciate, but the "broad theme" still is that the local unit is tied to the dollar index and USD/INR remains a buy on dips, Agarwal added.
Premiums are a "receive on uptick" primarily based on the U.S. rate view, he said, adding that the Fed could raise rates to near 5.50% this year while the Reserve Bank of India takes it to 6.75%.
The 1-year USD/INR implied yield is currently at 2.16%.
(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)
By Anushka Trivedi and Nimesh Vora
