Rupee seen lower as growth fears hit risk sentiment

The Indian rupee is likely to weaken at open against the US dollar on Thursday as mounting global growth concerns prompted investors to exit risk assets.

The rupee is tipped at around 81.45 to the dollar in early trading against the dollar, compared with the 81.24 close in the previous session. The local currency on Tuesday climbed 0.6%, likely helped by dollar debt inflows, according to traders.

The rupee would have anyway found it challenging to move above 81.20, and the turn in risk sentiment has made it all the more unlikely, a trader at a Mumbai-based bank said.

The S&P 500 index fell the most in over a month overnight as weak US retail sales data fuelled worries on the growth front.

Retail sales fell more than expected in December, putting consumer spending and the overall economy on a weaker growth path heading into 2023. Further, the decline in retail sales in November was revised to show an even weaker reading.

The data signals that the US Federal Reserve's aggressive rate hikes are impacting economic activity, prompting a slowdown in growth.

Treasury yields plunged as investors became more convinced that the Fed is nearing the end of the current rate hiking cycle. The 10-year US yield declined around 16 basis points overnight to near 3.37%, its lowest level since September.

Economists pointed to the possibility that the string of poor US data likely meant the Fed's 25 bps rate hike on Feb. 1 could be the last of the cycle.

"Widespread falls in key retail sales components and broadening signs that inflation pressures are rapidly moderating means we are getting very close to the peak for Federal Reserve policy rates," ING Bank said in a note.

"A 25bp hike in February still appears odds-on, but the case for additional hikes is looking less convincing."