Rupee posts biggest single-day gain in two months on strong growth data

Rupee's direction on Thursday will be impacted by the central bank's policy decision and how market participants want to position themselves before U.S. inflation data. Non-deliverable forwards indicate the rupee will open barely changed to the U.S. dollar from 82.8150 on Wednesday. In the last two sessions, the currency has been in the range of around six paisa.

The Reserve Bank of India (RBI) has possibly been selling dollars to prevent the rupee from weakening below what is regarded a highly important level, according to traders.

"It is obvious that there is an unwillingness to take USD/INR higher and the downside anyway looks capped," a forex trader at a Mumbai-based bank said.

"With two major events lined up, the question is whether 83 is vulnerable. U.S. inflation, according to me, is more vital for the rupee than the RBI."

The RBI, at 10.00 a.m. IST, is not expected take any rate action, though the decision is now seen less of a formality in the wake of a jump in food prices.

The key change to watch for would be the RBI's assessment on a spike in food inflation and any potential revision to the current fiscal inflation projections, IDFC First Bank said in a note.

An unexpected rate hike by the RBI will "provide a boost to the rupee, which will not last long" and push USD/INR premiums higher, the forex trader said.

Later in the day, U.S. inflation data is expected to show that core prices rose by 0.2 per cent month-on-month and by 4.8 per cent on-year, according to a poll conducted by Reuters.

Investors are assigning a 15 per cent probability of a rate hike by the U.S. Federal Reserve at its September meeting.

"In-line or lower inflation figures would probably be sufficient to lower the odds of a September hike near to zero," DBS Research said in a note.

KEY INDICATORS:

One-month non-deliverable rupee forward at 82.92; onshore one-month forward premium at 8 paisa

USD/INR NSE September futures settled at 82.9125 on Wednesday

USD/INR August forward premium at 5.25 paisa

Dollar index at 102.46

Brent crude futures down 0.2 per cent at $87.4 per barrel

Ten-year U.S. note yield at 4.02 per cent

As per NSDL data, foreign investors sold a net $7.1mln worth of Indian shares on Aug. 8

NSDL data shows foreign investors bought a net $3.2mln worth of Indian bonds on Aug. 8