Rupee back to 78 levels vs dollar as FPIs return to Indian markets

The rupee strengthened well below 79 against the dollar on Tuesday and closed at its strongest level in over a month, as weakness in the greenback globally and a slide in crude oil prices bolstered the appetite for emerging market currencies. The rupee settled at 78.71 per dollar, against the previous day’s close at 79.03. Tuesday’s level was the best for the domestic currency since June 27.

The US dollar index, a measure of the currency against six major rival pairs, was at 105.67 around 6.15 pm IST on Tuesday. It had climbed to a 20-year high of 108.54 in late July.

“The Indian rupee outperforms Asian currencies as lower oil prices improve the outlook for the trade balance and foreign fund buying helps fill the gap in dollar demand and supply. The local currency has been one of the biggest beneficiaries of the recent slide in crude oil prices,” HDFC Securities Research Analyst Dilip Parmar told Business Standard.

Since July 26, the day the US Federal Reserve made its latest policy statement, the rupee has strengthened 1.4 per cent versus the US dollar, faring better than the Singapore dollar, the South Korean Won, the Indonesian rupiah, the Malaysian ringgit, the Chinese yuan, the Hong Kong dollar, the Philippine peso, the Taiwan dollar and the Turkish lira. Though the Fed hiked interest rates, the American central bank's commentary was interpreted as a sign of a slower path of monetary tightening ahead.

The decline in crude oil prices -- which reduces upside risks to India’s inflation – also boosted sovereign bond prices, with the yield on the 10-year benchmark paper settling at its lowest level in three months on Tuesday.

The yield on the 10-year benchmark 6.54 per cent 2032 bond settled at 7.20 per cent, the lowest since May 2. Bond prices and yields move inversely.

Brent crude futures were trading at $100.38 a barrel (up 0.35 per cent) at 6.15 pm IST. WTI crude was at $94.34 a barrel, up 0.48 per cent. Lower petroleum prices help reduce pressure on India’s current account deficit and inflation, given that the country imports more than 80 per cent of its crude oil needs.

With officials from the Reserve Bank of India (RBI) recently saying that domestic inflation is likely to have peaked, bond traders have turned optimistic about the central bank signalling a less aggressive trajectory for rate hikes.

The RBI’s Monetary Policy Committee, which would detail its next policy statement on August 5, has hiked the repo rate by 90 basis points since May.

According to dealers, firm dollar sales on account of corporate inflows, as well as for foreign investment in Indian assets gave the rupee a boost on Tuesday.

Foreign portfolio investors, of late, have turned net buyers of Indian stocks after remaining net sellers for nine straight months, beginning October 2021. FPIs were net buyers of local stocks to the tune of $618 million in July, NSDL data shows. In August, so far, FPIs have net purchased $860 million worth of equities.

After weakening to a record low of 80.06 per dollar on July 21, the rupee has scripted a strong turnaround versus the greenback as slowing growth in the US has led to hopes of the Federal Reserve tempering the pace of future rate hikes. So far in 2022, the domestic currency has given up 5.6 per cent versus the dollar.

“Foreign fund inflows, a decline in crude oil prices, and a weak US dollar have helped the rupee gain a healthy correction after losing one-sidedly over the past two months,” CR Forex Advisors MD Amit Pabari wrote.

“Going forward, fundamentals are stating the biasness of USD/INR on the upside and the pair shall hold support close to 78-75 levels. A pullback towards 78.75 could continue before the pair resumes its upward journey back to 80 levels,” he said.