The rupee strengthened sharply to a five week intra-day high against the US dollar on Monday, supported by a sharp decline in crude oil prices and optimism over measures announced by the Reserve Bank of India (RBI) to attract foreign currency inflows, said dealers.
The domestic currency settled at 94.72 per dollar, up 0.42 per cent from its previous close of 95.11 per dollar. With today’s gain, the Indian unit has erased all its losses incurred since April.
The yield on the benchmark 10-year government bond also softened by 2 basis points to settle at 6.87 per cent, its lowest in two months, since April 15 of the current year. “The bond yields are expected to remain in the current range of 6.85 per cent to 6.95 per cent,” said a dealer at a primary dealership. “The fall in crude and expectation of a peace deal led to rally, but I don’t see yields moving much from here in the absence of firm cues,” he added.
The rupee touched an intraday high of 94.45 per dollar after international crude oil prices fell following reports of a preliminary agreement between the US and Iran that could lead to the reopening of the Strait of Hormuz. Brent crude declined more than 5 per cent to around $83 per barrel.
In June, the Indian unit strengthened 0.3 per cent against the dollar.
“We believe this marks the beginning of a more durable recovery rather than a one-off bounce. Two powerful tailwinds are now converging,” said Anindya Banerjee, Head of Commodity and Currency Research, Kotak Securities.
“Over the next one to two weeks, we expect it to strengthen towards 94 per dollar, and a decisive break of that level would open the door to 93 per dollar, and potentially 92.5 per dollar, over the following 2-3 months. For now, 94 per dollar is the key level to watch, and below that, 93 per dollar,” he added.
The rupee has recovered about 2.5 per cent from the record lows seen last month, when elevated oil prices and geopolitical tensions had pushed the currency close to 97 per dollar.
“The downside risks for INR have diminished; the authorities are actively looking at ways to attract capital inflows and we expect that the announced measures will be sufficient to keep the overall BoP in balance,” Morgan Stanley said in a note to its clients. “This should help stabilise INR, with the path from here dependent on oil price developments,” the note added.
Market participants said lower oil prices, coupled with the RBI’s recent steps to encourage foreign currency deposits and overseas inflows, improved sentiment towards the rupee.
The measures include tax exemptions on interest income and capital gains for foreign investors in government securities, expansion of the Fully Accessible Route (FAR) to select long-tenor government bonds and green bonds, wider investment access for non-resident individuals, and the RBI’s decision to bear hedging costs on fresh three-to-five-year FCNR(B) deposits mobilised until September 30.
Dealers estimate the steps could attract $40-55 billion in inflows over the coming months.
Traders said a decline in Brent crude towards the low-$70 per barrel range could ease pressure on India’s import bill and current account deficit, while improving global risk appetite may support additional flows into domestic equities, thereby, further aiding the rupee against the greenback.
The rupee is currently trading 5.11 per cent weaker against the dollar in the current calendar year, whereas, in the current financial year, the local currency is trading 0.1 per cent stronger.
