The Fed has signalled a 75 basis point (bps) rate hike at its July 26-27 meeting, although data last week showing that inflation hit 9.1% year-on-year in June has raised the possibility of a larger 100 bps hike later this year.
India's partially convertible rupee was trading at 79.77/78 per dollar at 0512 GMT, compared to its close of 79.73 on Monday. The unit rose to a high of 79.6950 during trade on Monday, its strongest since July 13.
"Cash dollar demand seems to have moderated. Dollar/rupee is likely to trade a 79.55-79.85 range intraday, with down side bias," analysts at IFA Global Research said in a daily note.
Traders will track domestic equities for clues on foreign fund flows, while gains in other Asian currencies is expected to help sentiment. Domestic shares and, however, lost 0.8% each.
After heavy foreign outflows every month since November, Indian equities have received a net $52.95 million of inflows this month until Monday. The Nifty and the Sensex, meanwhile, are up about 4.5% each so far this month.
In the bond market, the benchmark 10-year bond yield was trading up 1 basis point at 7.40% but is seen hold in a tight 3-4 basis point range during the session, traders said.
U.S. Treasury yields edged slightly higher overnight as investors awaited the Federal Reserve's likely 75 basis point interest rate increase amid growing concerns about an economic slowdown and the potential for recession.
(Reporting by Swati Bhat; editing by Uttaresh.V)
By Swati Bhat
