The Indian rupee notched its biggest single-session gain in three weeks on Tuesday, boosted by a spurt in dollar selling in the non-deliverable forward market, which also prompted traders wagering against the currency to exit positions.
The rupee ended at 94.9675 per dollar, up 0.4% from its previous close, after oscillating between modest gains and losses in early trading.
The South Asian currency jumped in the afternoon, with traders pointing to a pickup in dollar-selling interest in the non-deliverable forward (NDF) market.
The selling momentum was visible in the 1-month NDF points briefly trading below the 1-month onshore forward premium, reversing a trend observed over recent sessions. NDF points trading below their onshore counterparts signals that the former saw a higher intensity of dollar selling interest.
"Perhaps the market is anticipating some inflows or some long positions (on USD/INR) are being cut," a trader at a state-run bank said. The trader added that interbank participants also had exited very near tenor long USD/INR positions on Tuesday.
Most Asian currencies also firmed, with the Korean won rising 0.4%. The dollar index was steady at 100.95.
Investors have continued to pare back expectations of U.S. rate hikes this year following an underwhelming jobs report that came in far below expectations.
Money markets are now pricing in roughly 29 basis points worth of Federal Reserve rate hikes by December, down from about 38 bps a week ago.
"Markets probably require a convincing narrative to short the high-yielding dollar in such a favourable environment for carry. Unless the minutes surprise on the dovish side, that narrative should not emerge this week," analysts at ING said in a note.
The minutes of the Fed's June meeting are due on Wednesday and may offer cues on the future trajectory of interest rates in the world's largest economy.
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