(Reuters) - The Indian rupee is tipped to open weaker against the U.S. currency on Wednesday, as concerns over the Federal Reserve's interest rate decision boosted the dollar index and dampened risk appetite.
The rupee is expected at around 79.85 per dollar in early trades, down from 79.7500 on Tuesday. The local unit has ended flat over the last three sessions.
"You get a sense that markets are just bidding time before deciding which side to lean on. That is understandable," a dealer at a Mumbai-based bank said.
"Obviously, the Fed decision today is a big event risk and one that could potentially shape the direction of rupee and other emerging market currencies for the next several weeks."
The dollar index climbed back above 110 in the previous session, as traders braced for a hawkish Fed outcome . U.S. equities dropped overnight and near maturity Treasury yields rose to new 15-year highs.
The U.S. central bank later in the day is tipped to raise rates by 75 basis points and policymakers are expected to upwardly revise their interest rate projections. There is near 1-in-5 chance that the Fed may decide to opt for an even more aggressive 100 bps rate hike.
The size of the rate hike, Fed Chair Jerome Powell's comments on the future path for interest rates and what the so called dot-plot reflect as the terminal rate will be key points for the markets.
For rupee, the key question following the Fed's decision will be whether it can continue to be resilient and hold above the 80 level. The Reserve Bank of India's (RBI) defence of the 80 level could once again be tested.
"For how long can Asian central banks, including RBI, defend FX and at what cost," said Madhavi Arora, lead economist at Emkay Global Financial Services.
"RBI's reaction function will depend on global financial disruption spillovers."