Market News

By Jaspreet Kalra

MUMBAI (Reuters) - The Indian rupee struggled for direction on Wednesday, as comfort from a broadly weaker dollar and modest inflows proved transient in the face of strong demand for the greenback from state-run banks and weakness in the Chinese yuan.

The rupee rose to a peak of 85.07 per U.S. dollar in early trading but quickly shed gains to drop to a low of 85.51 before reversing course yet again to quote up by 0.1% at 85.2325 as of 10:50 a.m. IST.

Traders said the rupee was bogged down by dollar demand from state-run and foreign banks as well as the yuan's retreat from a six-month peak to a 0.2% drop to 7.21.

There were "decent inflows in the morning, but their impact barely lasted in the face of strong dollar bids," including from a large state-run bank, a foreign exchange trader at a Mumbai-based bank said.

The dollar index was hovering just shy of the 101 mark, after falling 0.8% in the previous session as U.S. consumer prices rose less than market expectations.

Meanwhile, India's consumer prices also increased less than expected at 3.16%, bolstering expectations that the Reserve Bank of India cut interest rates in June.

The inflation print "implies room for the RBI to continue its policy easing. Meanwhile, markets may have taken off some geopolitical risk premium on the rupee following the ceasefire with Pakistan, with rupee volatility easing," MUFG Bank said in a note.

The rupee's 1-month implied volatility, a gauge of future expectations, was hovering near 5%, well off the peak of above 7% hit last week.

Dollar-rupee forward premiums were lower on the day, though, with the 1-year implied yield down 5 basis points at 2.10%, weighed down by an uptick in U.S. bond yields.

(Reporting by Jaspreet Kalra; Editing by Savio D'Souza)