Rupee firms, traders tread gingerly as RBI decision looms

(Updates for morning trade)

By Jaspreet Kalra

MUMBAI, Dec 5 (Reuters) - The Indian rupee firmed in early trading on Friday, extending its recovery above the 90 per dollar handle as traders largely held off on directional wagers on the currency heading into a closely-watched central bank policy outcome.

The rupee was at 89.7250 as of 09:25 a.m. IST, up 0.3% from its previous close.

The currency had touched an all-time low of 90.42 in the previous session, but a combination of foreign and state-run banks' dollar sales alongside likely cutting of short wagers on the currency helped recovery.

While most economists expect the Reserve Bank of India to deliver a rate cut when the decision is announced at 10:00 a.m. IST, market participants have nearly taken off all wagers on easing after India reported stronger-than-expected economic growth and the rupee slid past the 90-mark.

Despite the modest recovery, FX advisory firm Finrex Treasury advisors does not expect to see a near-term trend reversal for the rupee and is recommending that exporters sell cash dollars, while importers buy the dips on the dollar.

On the day, likely portfolio inflows and wariness to bet against the rupee ahead of the RBI decision helped the currency, a trader at a state-run bank said.

RBI policymakers' commentary on the rupee's recent slide will also be in focus alongside any measures to support liquidity in the banking system.

The decision, in addition to impacting the spot rupee market, is also expected to have a bearing on dollar-rupee forward premiums which have surged over recent sessions.

The 1-year dollar-rupee implied yield was last at 2.50%, up 29 basis points on the week while the 1-month forward premium was at 22 paisa, up from 16.5 paisa at the end of last week.

Elsewhere, the 10-year sovereign bond yield was a tad lower at 6.5181% and the benchmark Nifty 50 index was little changed on the day. (Reporting by Jaspreet Kalra; Editing by Rashmi Aich and Harikrishnan Nair)