The Indian rupee opened 10 paise stronger against the US dollar on Monday (November 9) at 93.81, compared with its previous close of 93.91, as improved sentiment around global technology stocks and a recovery in foreign investment flows provided support to the domestic currency.
The rupee has gained more than 1% over the past week, supported by a sharp pickup in foreign portfolio investor (FPI) inflows into Indian equities and a decline in crude oil prices.
Foreign investors pumped more than $4 billion into Indian equities last week. The inflows came as investors reassessed their exposure to markets such as South Korea and Taiwan, which have benefited significantly from the artificial intelligence (AI) trade but witnessed selling pressure amid concerns over technology sector valuations and growth prospects.
The recent selloff in technology shares across the US and Asian markets, following the Democratic Party’s sweep in the US midterm elections on Wednesday, had raised concerns about the outlook for the sector.
However, some of those concerns eased towards the end of last week, with the Nasdaq recovering on Friday (November 6) and South Korean and Taiwanese markets also gaining on Monday (November 9).
A currency trader at a bank said the movement between AI-linked and non-AI-linked markets has become an established investment trend, and its direction will remain important for Indian equities and the rupee.
Why did the rupee strengthen last week?
Two factors have supported the rupee’s recovery: foreign investment inflows and lower crude oil prices.
Foreign investors return to Indian equities
Foreign investors bought more than $4 billion worth of Indian equities last week. Higher foreign investment inflows increase the supply of dollars in the domestic foreign exchange market as investors convert foreign currency into rupees to purchase Indian assets. This can support the rupee against the dollar.
Crude oil prices fall sharply
Brent crude prices declined nearly 20% last week, providing another source of support for the Indian currency.
India imports a large part of its crude oil requirements. When international oil prices fall, the country’s import bill and demand for dollars to pay for crude imports can moderate, easing pressure on the rupee.
The combination of stronger foreign equity inflows and lower oil prices could provide some relief to the currency, which has faced pressure from capital outflows and elevated crude oil prices over the past several months.
What could limit the rupee’s gains?
The outlook for the rupee will also depend on global interest rate expectations and movements in the US dollar.
Most Asian currencies weakened on Monday (November 9) after stronger-than-expected US payroll data strengthened expectations that the US Federal Reserve could raise interest rates in December.
Higher US interest rates can make dollar-denominated assets more attractive to global investors, potentially increasing demand for the dollar and putting pressure on emerging market currencies, including the rupee.
For the Indian currency, the sustainability of foreign investment inflows, crude oil prices and the US interest rate outlook will remain key factors to watch.
-With Reuters inputs
