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MUMBAI: The Indian rupee logged modest gains in early trading on Monday on dollar sales from foreign banks but traders expect the upside to be capped as U.S. bond yields continue to hover at elevated levels.

The rupee was at 83.4325 against the U.S. dollar as of 10:00 a.m. IST, up slightly from its close at 83.47 in the previous session.

The currency slipped to a record low of 83.5750 on Friday but recovered on the back of heavy intervention from the Reserve Bank of India (RBI), traders said.

“Large offers” to sell dollars from foreign banks, likely on behalf of custodial clients, helped the rupee on Monday, a foreign exchange trader at a state-run bank said.

Most Asian currencies were muted, somewhat comforted by ebbing fears of a wider conflict in the Middle East.

The dollar index held above 106 while the 10-year U.S. Treasury yield rose 5 basis points (bps) to 4.66%.

Indian rupee likely to drop to record low on escalating Middle East tensions

Fears of a escalation in the conflict between Iran and Israel faded after the former said on Friday that it had no plan to retaliate following an apparent Israeli drone attack within its borders.

Brent crude oil futures were last quoted down about 0.7% at $86.62 per barrel.

The rupee is likely to be in a “consolidation phase” on Monday, Dilip Parmar, a foreign exchange research analyst at HDFC Securities said. The near-term resistance for the rupee is pegged at 83.20, Parmar added.

Meanwhile, dollar-rupee forward premiums eased, with the 1-year implied yield down 2 basis points at 1.66%, pressured by a rise in near-maturity U.S. bond yields.

The focus this week will be on personal consumption expenditure inflation, due on Friday, for further cues on when the Federal Reserve may begin to cut policy rates.

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