MUMBAI: The bias on the Indian rupee is seen on the downside in Wednesday's trading session after the Chinese yuan dropped to a fresh six-month low to the U.S. dollar.
Non-deliverable forwards indicate the rupee will open slightly weaker than 82.71 in the previous session.
"Looking at the yuan, you would have to say a move higher (on USD/INR) is more likely," a spot trader said.
Having said that, the question then is if the 82.85-82.90 level can be taken out, the trader added.
The offshore Chinese yuan dropped 0.4% to 7.1180 to the U.S. dollar, the lowest since Nov 2022, on concerns over the growth outlook.
Data showed that China's factory activity contracted faster than expected in May on weakening demand, pushing Asian shares and U.S. equity futures lower. Shares in Hong Kong and China dropped about 2% and 1%.
The yuan is now down by 2.8% against the dollar in May. The dollar's overall strength has been another key factor for the Chinese currency's losses.
The dollar index is up 2.6% this month, supported by expectations of another rate hike by the U.S. Federal Reserve and investors are reassessing the probability of rate cuts this year.
Meanwhile, the legislation brokered by President Joe Biden and House Speaker Kevin McCarthy to lift the U.S. debt ceiling passed an important hurdle late on Tuesday, advancing to the full House of Representatives for debate and an expected vote on passage on Wednesday.
U.S. equities were little changed overnight, unable to make traction from the progress on the debt ceiling.
"Apart from lingering uncertainty given that the bill will need bipartisan support to pass (expected), the market's hesitancy could reflect a growing sense that the FOMC may be compelled to raise interest rates when it meets 13/14th June," ANZ said in a note.
(Reporting by Nimesh Vora; Editing by Sohini Goswami)