MUMBAI, Aug 26 (Reuters) - The Indian rupee rose on Monday and forward premiums jumped after Federal Reserve Chair Jerome Powell's more dovish-than-expected comments raised the possibility of a larger rate cut at next month's meeting.

The rupee was at 83.8475 to the U.S. dollar at 10:40 a.m. IST, up from 83.89 on Friday. The implied yield on the dollar/rupee 1-year forward premium rose to 2.14%, the highest since May 2023.

Powell said that the "time has come for policy to adjust", indicating that Fed policymakers will most likely decide to slash borrowing costs when they meet next in September. Powell's remarks signalled he had more confidence that inflation is heading back to the Fed's target while emphasizing on the softness in the U.S. labour market.

"The message from Chair Powell was perhaps more unequivocal than what markets were anticipating," MUFG Bank said in a note.

The Fed is now putting more emphasis on downside risks to the labour market rather than upside risks to inflation, it said.

With the labour market now seemingly a priority, the August U.S. jobs report due next Friday will be the most important data point on whether the Fed will cut rates by 25 basis points or 50 at the Sept. 17-18 meeting.

Futures are currently pricing in a near 40% chance of a half-a-percentage point cut in interest rates.

Chair Powell did not push back on market pricing, and nothing he said suggests a 50 bps rate cut is off the table, MUFG said.

RUPEE UPSIDE LARGELY CAPPED

The rupee opened at 83.81 to the dollar, following which it has struggled amid dollar demand from importers.

It is the same price action that has been witnessed in recent days, a currency trader said.

The dollar/rupee pair faces "a barrage of bids on any sort of dips", he said.

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https://www.reuters.com/markets/currencies/rupee-advances-forward-premiums-climb-dovish-fed-outlook-2024-08-26/