MUMBAI - The Indian rupee logged its best single-day performance in nearly two months on Wednesday, bolstered by hopes the U.S. Federal Reserve would ease policy rates next year.
The rupee closed at 83.1425 against the U.S. dollar versus its close at 83.3325 on Monday. Local markets were shut on Tuesday for a holiday.
The Indian currency rose 0.23% on Wednesday, its biggest single-session gain since Sep. 20, after hitting a near two-month high of 83.02 earlier in the session.
However, dollar purchases from state-run banks, likely on behalf of importers, erased some gains, traders said.
"We need to wait for a confirmation of rupee strengthening," said Jigar Trivedi, senior research analyst - currencies and commodities at Reliance Securities.
In case the rupee settles above 83 to dollar, the local unit could gain further towards 82.70 in the coming sessions, but with importers looking to buy the dollar at every dip, Trivedi added.
The Korean won jumped more than 2% while the Malaysian ringgit and the Indonesian rupiah rallied over a percent each on softer-than-expected U.S. inflation data.
U.S. consumer prices were unchanged in October and the annual rise in underlying inflation was the smallest in two years.
The data reinforced market expectations that policy rates in the U.S. may have peaked and that the Fed may pivot to rate cuts by May next year.
"With growth concerns likely to increase over the same period, this should give the Federal Reserve the flexibility to respond with interest rate cuts," ING Bank said in a note.
Possibility of a Fed rate cut in the first half of 2024 sent the 10-year U.S. Treasury yield to 4.4260% on Wednesday, nearly 60 basis points lower than its recent high.
The fall in U.S. yields pushed rupee forward premiums higher. The 1-year implied yield rose four basis points to 1.55% on Wednesday.
(Reporting by Siddhi Nayak; Editing by Mrigank Dhaniwala)