MUMBAI, May 22 (Reuters) - The Indian rupee declined and forward premiums dropped after the country's central bank said it will withdraw the highest denomination note from circulation.
The rupee was last at 82.82 to the U.S. dollar, down from 82.66 in the previous session. The local currency has been in an 82.7325-82.8275 range.
The USD/INR pair is yet again "running into offers" around 82.80, a currency trader at a private bank said.
"Obviously, it leads to the question of whether the RBI is there. Just have to wait and see how much we near 82.80," the trader said.
The Reserve Bank of India has resolutely defended around the 82.80-82.90 level in the past.
The USD/INR forward premiums dropped after the RBI said it would withdraw its highest denomination 2,000-rupee notes from circulation. The 1-year implied yield dropped to 1.93%, hovering near the lowest since December.
The withdrawal will lead to a further fall in forward premiums, putting pressure on the rupee, said Madhavi Arora, the lead economist at Emkay Global Financial Services.
Meanwhile, the dollar index saw a bit of pullback following Federal Reserve Chair Jerome Powell's comments signalling a pause in rate hike in June.
Powell said on Friday it was unclear if U.S. interest rates will need to rise further, with central bank officials balancing uncertainty about the impact of past hikes on borrowing costs and recent bank credit tightening with the fact that inflation is proving hard to control.
Investors who are counting on a pause in June "found the much-needed reassurance" from Powell, said Yeap Jun Rong, market strategist at broker IG Asia.
The odds of a Fed rate hike in June dropped. (Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)
