The Indian currency has gained more than 1% this week, but analysts expect pressure to return as temporary dollar inflows fade and crude prices remain elevated.
The Indian rupee has staged a notable recovery this week, crossing below the ₹95-to-a-dollar level and reaching a two-month high. The currency gained more than 1% during the week, making it one of Asia’s better-performing currencies over the period.
A major factor behind the move has been stronger-than-expected foreign-currency inflows into the domestic financial system. The Reserve Bank of India’s special measures for foreign currency non-resident deposits and related inflows have brought in around $136.4 billion, providing substantial support to the rupee. A softer US dollar has also helped the domestic currency gain ground.
RBI follows provide temporary support.
The scale of the inflows has exceeded earlier market expectations and has strengthened India’s foreign exchange position. The inflows have also increased liquidity in the banking system, requiring the RBI to manage the additional rupee liquidity.
However, currency analysts caution that the recent strength may not necessarily represent a lasting change in the rupee’s underlying trend. Much of the support has come from special measures and central bank intervention rather than a sustained improvement in the factors that traditionally drive the currency. The approaching settlement of the swap-related transactions could therefore become an important test for the rupee.
September 11 could be a key date.
Analysts are watching the period after September 11, when the impact of the swap-related flows is expected to diminish. Once this temporary support fades, normal demand for dollars from importers could become more visible.
Amit Pabari of CR Forex has indicated that the dollar-rupee pair could move towards the ₹95.50-₹96 range if the effect of these inflows weakens. Other market analysts continue to see the rupee trading within a relatively narrow range in the near term.
The bigger concern for the rupee is the sharp increase in crude oil prices. Brent crude moved above $96 a barrel, recording a weekly rise of more than 7%, amid renewed US-Iran tensions and concerns over Middle Eastern oil supplies. For India, higher crude prices can translate into greater demand for US dollars because the country imports a substantial portion of its oil requirements. This creates a direct headwind for the rupee. The US Federal Reserve’s interest-rate outlook is also likely to influence the currency market. Strong US inflation or employment data could revive expectations of higher US interest rates, potentially strengthening the dollar and putting renewed pressure on emerging-market currencies.
