The Indian rupee strengthened to a 10-week closing high of 94.4850 per US dollar on Thursday, marking the sharpest daily gain since July 27 and the fifth consecutive session of gains. As per The Economic Times, the currency closed 0.5% higher after opening at 94.30 and touching an intraday high of 94.27, demonstrating continued momentum from the previous session's rally. The rupee has gained more than 1 per cent in the last one week, making it one of Asia's best-performing currencies. India mobilised a record $136.4 billion through foreign-currency deposits under a special central-bank programme aimed at bolstering the country's foreign-exchange liquidity, with foreign currency non-resident (Bank), or FCNR(B) deposits bringing in $127.226 billion as of August 31 under the special programme. Including overseas foreign-currency borrowings (OFCB) and external commercial borrowings (ECB), total inflows under the measures reached $136.377 billion, according to RBI data. India's foreign exchange reserves, which had already risen to a record $729.3 billion in the week ended August 28, are expected to climb further as the inflows are absorbed. Sentiment was boosted after the Reserve Bank of India's special measures drew far more inflows than economists had expected, reinforcing views that the central bank could aggressively use its recently acquired firepower to manage the rupee. The rupee opened marginally higher at 94.46 against the US dollar on Friday (September 4), gaining 3 paise from Thursday's close of 94.49, extending its winning streak to five consecutive sessions.
The strong inflows have resulted in a surge in banking system liquidity, which weighed on overnight money market rates. As per Business Standard, the net liquidity in the banking system was at a record surplus of ₹9.7 trillion on Wednesday, the latest data from the RBI showed, compared to the previous high of ₹9.2 trillion in September 2021. The overnight weighted average call rate (WACR) — which is the operating target of monetary policy — fell below the Standing Deposit Facility (SDF) rate to settle at 4.95 per cent, against the previous close of 5.02 per cent. The SDF rate, which currently stands at 5 per cent, is the interest rate at which banks park their surplus funds with the RBI without providing collateral. The central bank conducted two VRRR auctions on Thursday worth ₹7.5 trillion, with banks parking ₹5.53 trillion against the notified amount at a weighted average rate of 5.24 per cent. Market participants expect the RBI to rely on a mix of variable rate reverse repo operations (VRRRs) and a possible incremental cash reserve ratio increase (ICRR) to manage the excess liquidity.
Indian shares gave up early gains to end lower on Thursday, tracking mixed cues from global markets, according to Business Standard. Foreign institutional investors purchased equities worth ₹6,688.37 crore on a net basis on Wednesday, as reported by exchange data. U.S. Treasury yields eased from multi-year highs and oil steadied after a three-day rally, helping ease inflation and interest-rate concerns. Market participants have raised the probability of a September Fed rate hike, pushing US Treasury yields higher and triggering a broad dollar rally. The 10-year bond yield was around 4.78%, hovering around its highest level in almost three years, with the odds of a September rate hike at around 63%, according to The Hindu BusinessLine. Markets have recently increased bets on a Fed rate hike. They now assign a roughly two-in-three chance that the Fed will deliver a 25-basis-point rate increase this month, up from 37 per cent a week back, according to CME Group's FedWatch tool. On Friday, domestic equities showed strong performance with Sensex jumping 468.64 points to 76,621.50 in early trade, while the Nifty was trading up 42.10 points at 23,915.55, as reported by The Hindu BusinessLine. Foreign institutional investors purchased equities worth ₹2,345.87 crore on a net basis on Thursday, according to exchange data.
The recent rally in crude oil prices could limit the rupee's gains, with Brent crude trading at around $95.90 per barrel in futures trade, up 0.40%, amid renewed tensions between the US and Iran and concerns over possible disruption to oil flows through the Strait of Hormuz. As per CNBC TV18, India imports a large share of its crude oil requirement, and higher oil prices can therefore increase the country's import bill and demand for dollars, putting pressure on the rupee. "Overall, the FCNR story has given the rupee a strong shot in the arm, but the underlying fundamentals still carry their share of risk. 94.00–94.20 remains a strong support zone. Any negative surprise, especially from the oil front, could pull USDINR back up towards 95.00, 95.50 and eventually 96.00," said CR Forex Advisors MD - Amit Pabari. The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading at 99.05, higher by 0.15 per cent on safe-haven demand amid renewed US-Iran tensions. For now, the currency has managed to strengthen despite the rise in crude prices, whether that trend continues will depend on whether foreign inflows and RBI intervention can offset the pressure from a higher oil import bill.
"The 93.80 level during September can't be ruled out as we have got certain reserves muscles now," said veteran foreign exchange consultant KN Dey, as reported by The Economic Times. The overseas inflows are likely to push up the foreign reserves stock to a fresh high past $750 billion in the coming weeks, providing considerable firepower to defend the currency, said DBS Bank senior economist Radhika Rao. "Indian rupee rose sharply amid huge FCNR deposit inflows and FII buying. Softening of the US dollar and US treasury yields amid sharp appreciation in the Yen also supported the rupee," said Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan, as reported by CNBC TV18. Choudhary said the rupee is expected to trade with a positive bias on optimism over rising foreign inflows, a rise in risk appetite in global markets and softening of the US Dollar. "However, elevated crude oil prices and any fresh escalation of tensions between the US and Iran may cap sharp upside. Traders may take cues from trade balance, weekly unemployment claims and ISM services PMI data from the US," Choudhary added. The rupee's recent performance reflects the combination of strong foreign currency inflows, RBI intervention, and favorable global conditions, with the currency maintaining its positive trajectory despite ongoing market volatility.
