The rupee strengthened for a second day on cheaper oil and foreign inflows. Measured over a month and over a year, the recovery looks very different.
The rupee rose 17 paise to settle at 94.58 against the US dollar on Wednesday, according to provisional data, its second straight day of gains. On Tuesday it had risen to 94.75.
The rupee opened at 94.61, strengthened to as much as 94.50 during the session, and weakened to a low of 94.87 before settling at 94.58.
Four factors supported it. Crude oil prices kept falling, foreign investors kept buying Indian shares, the US dollar weakened against other currencies, and the US midterm election result improved global sentiment, according to forex traders.
Driving factor
Oil is the most important factor. India imports about 85% of its crude, so higher oil prices mean more dollars spent on imports, which weakens the rupee. Brent has fallen from its October highs on hopes of a US-Iran settlement, and Democrats winning both houses of Congress is seen as making renewed US strikes less likely. Lower oil reduces India’s need for dollars.
The second factor is foreign investment. Foreign portfolio investors bought a net ₹6,837 crore of Indian shares on Tuesday, their largest single-day purchase in about a year, and continued buying on Wednesday. When foreign investors buy Indian shares, they convert dollars into rupees, which supports the currency.
The third is the dollar itself. The dollar has weakened against major currencies, making it easier for the rupee and other emerging market currencies to strengthen.
The recovery saga
How far the recovery has gone depends on the time frame. Over the past month, the rupee has strengthened about 1.5%, according to market data. Over the past 12 months, it has fallen about 7%. Earlier this autumn, it weakened past 95 to the dollar as oil rose and foreign investors sold a record amount of Indian shares.
In other words, the recent gains have recovered only a small part of this year’s decline.
The RBI has managed the decline carefully. Rather than selling large amounts of dollars in the open market, which drains foreign exchange reserves, it has used targeted measures, including a special window for oil marketing companies to buy dollars and limits on speculative positions. Even so, India’s foreign exchange reserves have fallen for seven straight weeks, to about $720 billion, from a record of about $786 billion in early September.
A sustained recovery would help in several ways. A stronger rupee lowers the cost of imported oil, electronics and other goods, which helps control inflation. It reduces the cost of servicing foreign debt for Indian companies. And it reduces pressure on the RBI to spend its reserves defending the currency.
The risks remain. If talks with Iran break down and oil rises again, the rupee could weaken quickly. If foreign investors return to selling, the support from inflows would disappear. And a possible Fed rate increase in December would make US assets more attractive, which could pull money away from emerging markets including India.
For now, the rupee is getting relief rather than a full recovery. A move below 94 to the dollar would suggest a more lasting turnaround. Without further falls in oil and continued foreign buying, the Rupee’s seems to have made a base.
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