Rupee sheds 1% as forward premiums sink to historic lows

A cashier displays the new 2000 Indian rupee banknotes inside a bank in Jammu, November 15, 2016. REUTERS/Mukesh Gupta

MUMBAI, Dec 6 (Reuters) - The Indian rupee saw its worst trading session in more than two months on Tuesday to extend its decline against the U.S. currency amid chatter of corporate dollar outflows, while premiums plunged further.

The partially convertible rupee finished the session down 1.01% to 82.6150 per dollar at a one-month low. The currency has weakened 1.60% overall in the last two trading days.

Traders said they were caught off-guard by the rupee's sudden decline, prompting a round of stop losses that probably sped up the drop once USD/INR moved above 82.

In late afternoon trade, the rupee's losses accelerated as some more dollar outflows were seen on account of debt repayment and investments, a private bank trader said.

Meanwhile, USD/INR 1-year forward premiums sank to 1.64%, their lowest since 2010 and down over 300 basis points (bps) year-to-date.

Analysts believe this collapse has implications for the spot rupee as it can further fuel dollar demand and impact carry trades.

Markets were also focussed on the Reserve Bank of India's monetary policy decision due Wednesday morning, when a 35 bps hike is expected, according to a Reuters poll.

The rupee, along with other Asian currencies, was weighed by a steady greenback after upbeat U.S. services data overnight raised fears of the Federal Reserve pushing rates higher than what is currently priced in.

The dollar index hung on to most of the previous session's gains to be last at 105.30.

Futures currently show that traders expect the Fed rate to peak at around 5% mid-next year, but that could change if U.S. data continues to surprise positively.

Reporting by Anushka Trivedi in Mumbai; Editing by Janane Venkatraman

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