Summary:
The Indian rupee strengthened by 37 paise against the US dollar on June 25, supported by a sharp decline in crude oil prices and reports of RBI intervention in the forex market. Brent crude fell to around $72 per barrel as tensions in the Middle East eased and shipping through the Strait of Hormuz normalized. Improved investor sentiment and foreign inflows also aided the rupee's recovery. However, gains may remain capped due to the continued strength of the US dollar and expectations of higher US interest rates.
The Indian rupee started off the session on June 25 sharply higher, rising 37 paise against the US dollar, with support from a fall in the price of crude oil, and possibly due to RBI intervention in the forex market. The domestic currency began at 94.30 per dollar against its previous close of 94.67. The rupee had already rebounded after touching the key psychological level of 95 per dollar the previous day.
RBI Intervention Supports Currency
The rupee saw high volatility on June 24, fluctuating in an extensive 50 paise range. Reports suggested that the RBI may have conducted interventions in the foreign exchange market by selling dollars through public sector banks in order to keep the currency from depreciating beyond the 95-per-dollar mark. There were reports of exporters buying dollars at the current exchange rates as well.
Falling Crude Oil Prices Boost Sentiment
One of the biggest factors that contributed to strengthening of the rupee was falling crude oil prices. Brent crude was trading at around $72 per barrel, reverting to the same price level as before US and Israeli attacks against Iran on February 28. Brent prices dropped by more than 4% on Wednesday and subsequently fell by an additional 2% during the Asian trading session, reaching levels of around $72.28 per barrel.
The benchmark crude oil has dropped by more than 10% in the past week and even more than 21% during the month. This is almost half of what the price of the crude had reached back in mid-May when the price exceeded $125 per barrel. This has significantly decreased fears over inflation and economic growth in India, one of the world's top consumers of oil.
Strait of Hormuz Situation Eases
The fall in oil prices was preceded by indications of a reduction in the levels of geopolitical tensions in the Middle East region. The oil tankers started moving through the Strait of Hormuz following an agreement to end the dispute between the United States of America and Israel with Iran.
Investor actions in the recent past indicate that they are starting to price for an immediate normalization of the movement of ships in the strategically vital oil transport corridor.
Foreign Inflows and RBI Commentary Add Support
Improving sentiments among investors were favorable to the rupee as well. Inflows into Asian bond markets climbed to their highest level in three months in May. At the same time, recent statements by RBI Governor Sanjay Malhotra that it is too early to talk about raising interest rates have calmed market expectations. Meanwhile, the RBI has once again assured that it doesn’t target any particular level for the rupee exchange rate.
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Strong Dollar Limits Further Gains
Although there was an impressive start, the rupee could not advance any further because of the continued strength in the US dollar. The dollar index was trading around 101.50, near its yearly high levels, owing to the anticipation that the US Federal Reserve will continue with its high-interest rate regime because of its sturdy economy and stubborn inflation.
Near-Term Outlook
The market players feel that the fall in crude oil prices along with the intervention from RBI and risk-on mood may help stabilize the rupee in the short term. However, the strong performance by the US dollar and the prospects of tighter US monetary policy are expected to remain important drivers of the currency in the upcoming sessions.
