The rupee opened at 95.14 against the US dollar, up around 0.25% from Friday’s (July 31’s) close of 95.39. The opening level is the rupee’s strongest since July 7.
Why is the rupee strengthening?
Three key factors are driving the rupee’s recent recovery:
Lower crude oil prices ease pressure
Crude oil prices fell sharply after US President Donald Trump said plans for an attack on Iran had been put on hold to allow more time for negotiations over Tehran’s nuclear programme.
Brent crude for October delivery dropped nearly 5% to below $84 per barrel.
This is positive for India, which imports more than 85% of its crude oil requirement. Lower oil prices reduce the country’s import bill, improve demand for the rupee, and help narrow concerns over the current account deficit.
RBI’s FCNR swap scheme brings in over $40 billion
Another major trigger has been strong foreign currency inflows under the RBI’s concessional swap facility announced in June.
The central bank said on August 1 that the scheme had mobilised $40.82 billion in inflows till July 31.
Of this:
- $36.73 billion came through Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits
- $2.58 billion came via Overseas Foreign Currency Borrowings (OFCBs)
- $1.52 billion was raised through External Commercial Borrowings (ECBs)
The facility, announced on June 5 and operational from June 8, allows banks to swap eligible foreign currency inflows with the RBI at concessional terms. The objective is to attract overseas capital, strengthen forex reserves and improve external sector liquidity.
Higher inflows also provide the RBI with greater flexibility to intervene in the foreign exchange market when required.
RBI intervention continues to support the currency
Market participants said the RBI remained active in the foreign exchange market last week, selling dollars to curb excessive volatility.
According to bankers, the rupee appreciated around 1.2% last week, with repeated RBI intervention across different levels helping the currency recover from recent lows.
The combination of central bank support and easing crude prices has shifted market expectations. Just weeks ago, traders were worried the rupee could weaken beyond 97 per dollar. Now, many believe the currency has found near-term support.
What should markets watch next?
The sustainability of the rupee’s recovery will depend on several factors, including whether crude oil prices remain contained, the pace of foreign currency inflows, the US dollar’s global trend and the RBI’s intervention strategy.
Markets will also watch geopolitical developments in West Asia closely, as any renewed escalation could push oil prices higher and once again weigh on the rupee.
Separately, RBI data showed its net foreign exchange forward book narrowed marginally to $103.3 billion in June, reflecting a reduction in near-term dollar liabilities, another factor that traders will monitor while assessing the central bank’s currency management strategy.
-With Reuters inputs
