The Indian rupee appreciated for the second consecutive session on Tuesday, closing at Rs. 85.77 against the U.S. dollar, bolstered by a broad rally in domestic equities and sustained weakness in the greenback. A confluence of favorable macroeconomic indicators—including declining crude oil prices, easing wholesale inflation, and the U.S. government’s suspension of additional tariffs on India—provided strong support to the currency. Despite persistent foreign institutional investor (FII) outflows, investor sentiment remained upbeat, with the rupee regaining momentum in tandem with global risk-on cues. Traders, however, remain cautious amid lingering external uncertainties.
Currency Markets Rebound Amid Global Optimism
India’s currency markets echoed the upbeat sentiment seen across global financial centers, with the rupee gaining 33 paise to close at Rs. 85.77 per U.S. dollar in Tuesday’s session. This marks a continuation of its rebound from last week’s close of Rs. 86.10, reflecting a cumulative appreciation of 91 paise across two sessions.
The day’s trade opened at Rs. 85.85, the weakest level for the rupee during the session, before rallying to an intraday high of Rs. 85.59—buoyed by supportive macroeconomic signals and declining demand for the U.S. dollar in global forex markets.
Drivers Behind the Rupee's Uptrend
Several interrelated factors contributed to the rupee’s upward trajectory:
- Equity Market Momentum: The BSE Sensex surged 1,577.63 points (+2.10%) to close at 76,734.89, while the Nifty 50 advanced 500 points (+2.19%) to finish at 23,328.55. A strong performance in domestic equities tends to support the rupee by attracting foreign capital inflows and improving investor sentiment.
- Softening Crude Prices: Brent crude fell 0.11% to USD 64.81 per barrel, touching its lowest level in nearly four years. As India is a major oil importer, lower crude prices ease pressure on the trade deficit and inflation, offering critical relief to the rupee.
- Tariff Suspension by the U.S.: The Biden administration's decision to suspend an additional 26% tariff on Indian exports until July 9 eased trade tensions and provided clarity to exporters and investors, further boosting confidence in the Indian currency.
- Cooling Inflation: India’s wholesale price index (WPI) inflation fell to a six-month low of 2.05% in March, driven by lower food prices, particularly vegetables and potatoes. This suggests a more stable macroeconomic environment, reducing pressure on the Reserve Bank of India to act aggressively on interest rates.
The Dollar Index and Global Currency Trends
On the global front, the U.S. Dollar Index (DXY)—which measures the dollar against a basket of six major currencies—declined 0.02% to 99.38, its lowest level since March 1, 2022. This drop reflects broader investor expectations of a less hawkish Federal Reserve, amid signs of cooling inflation in the United States and mixed economic data.
Weakness in the dollar benefits emerging market currencies like the rupee, especially when coupled with improving domestic fundamentals.
Risks and Resistance: FIIs and Importer Demand
Despite the positive macroeconomic backdrop, the rupee’s rally may face near-term resistance due to FII outflows. According to exchange data, foreign investors net sold Rs. 2,519.03 crore worth of Indian equities on Friday, signaling caution amid global uncertainties.
Additionally, importer demand for dollars—especially from oil and commodity purchasers—could cap further gains. Traders are also watching U.S. economic data, including the Empire State Manufacturing Index, for clues on the trajectory of interest rates and the dollar.
Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan, noted that while the rupee remains supported at lower levels, a range-bound trade between Rs. 85.40 to Rs. 86.00 could be expected in the near term, barring any major external shocks.
Outlook: A Delicate Balance Ahead
The rupee’s current resurgence is backed by both domestic strength and a favorable global backdrop, but the currency’s path forward hinges on several dynamic variables:
- Crude oil trends: Continued weakness in oil prices would be a key tailwind.
- U.S. economic trajectory: Clarity on Fed policy could shift global risk sentiment.
- Domestic capital flows: Stability in FII behavior and institutional inflows will be essential.
While the macro environment currently favors currency appreciation, market participants remain alert to geopolitical shifts, commodity volatility, and policy signals from central banks. If positive trends persist, the rupee could consolidate below Rs. 86.00 in the short term, offering breathing room for both importers and policymakers alike.
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