Indian rupee ends higher as dollar weakens ahead of Fed outcome

By Sethuraman N R

MUMBAI (Reuters) - The Indian rupee strengthened on Wednesday, aided by a broad decline in the U.S. dollar ahead of the expected quarter-point rate hike by the Federal Reserve later in the day and broader strength in Asian peers.

The rupee closed up 0.08% at 81.8175 to the dollar, compared with 81.88 in the previous session.

The dollar index was down 0.3% as gloomy jobs data, a standoff over the U.S. debt ceiling, and uncertainties surrounding banking collapses clouded the investment outlook and raised bets for a pause and quicker reversal in the rate cycle. [USD/]

Oil prices extended losses on the day after plunging 5% in the previous session, as investors fretted about the health of the U.S. economy. [O/R]

Meanwhile, the Indian central bank was likely buying dollars via public sector banks on Wednesday to ensure that the rupee remained in a narrow range, traders told Reuters.

The falling dollar index, fall in bond yields, and strong Asian currencies gave momentum to the Indian rupee, said Dilip Parmar, research analyst at HDFC Securities.

"Still, the (Fed) event risks are there for the rupee," Parmar said, adding that an extended fall in oil prices also aided the Indian currency's move.

The focus is now on the Fed's policy decision. While the U.S. central bank will most likely raise rates by 25 basis points (bps), futures indicate that the probability of a pause has inched up slightly.

"The recent developments in the U.S. banking sector have all but encouraged a pause after this one last rate hike, and markets have fully priced out any extra bits of tightening beyond May," ING analysts said in a note.

"In our view, the Fed will prefer to leave the door open to more tightening on paper," ING added.

(Reporting by Nallur Sethuraman in Mumbai; Editing by Sohini Goswami)