INDIA RUPEE-Rupee ends higher, forward premiums climb to over 2-month high

By Nimesh Vora

MUMBAI, Dec 28 (Reuters) - The Indian rupee strengthened on Thursday while far forward premiums rose to their highest in more than two months on rising expectations of the U.S. Federal Reserve easing monetary policy cycle.

The rupee closed at 83.1650 to the U.S. dollar, up from 83.3450 in the previous session. The currency posted its biggest rise in a single rise in nearly two weeks. The dollar index was at its lowest since July, and Asian currencies rose.

For once, the rupee "managed to use the dollar's downturn", a FX trader said.

"The lack of demand (for USD/INR) that we saw yesterday clearly helped (the rupee). It will be an interesting last day (of the year)."

The dollar has struggled for most of this month in the wake of increasing confidence that the Fed will deliver a series of rate cuts next year, most likely beginning as soon as next quarter. Slowing inflation is expected to allow the U.S. central bank to focus on growth, and investors think that will mean aggressive rate cuts.

The probability of a Fed rate cut in January has risen to 16% from under 1% a month back, according to the CME FedWatch Tool. Odds of a March rate cut has climbed to over 85%.

The dollar index had fallen 2.5% in December, and that is on top of the 3% drop in November. The rupee has not benefited from the dollar's slump, thanks largely to the Reserve Bank of India's repeated intervention, according to traders.

The Fed rate cut expectations have pushed rupee premiums higher with the 1-year implied forward USD/INR yield hovering near 1.80%, up 25 basis points this month.

"We expect the RBI to prevent the rupee from reaching record lows. Once it crosses the 83.00-82.90 zone, it may move towards 82.50 levels," said Amit Pabari, managing director at fx advisory firm CR Forex. (Reporting by Nimesh Vora; Editing by Nivedita Bhattacharjee)