Rupee weakened against the US dollar in early trading on Thursday, November 12, losing six paise to trade at 93.77. A strengthening US dollar and rising American bond yields put pressure on the domestic currency, although lower crude oil prices and continued foreign investment inflows offered some support.
The rupee opened at 93.73 against the dollar in the interbank foreign exchange market before slipping to 93.77. The decline came a day after the domestic currency had gained six paise to close at 93.71 against the US dollar on Wednesday.
Forex market participants attributed the latest weakness largely to the strength of the American currency. Stronger-than-expected US inflation and employment figures have increased expectations of a possible interest rate hike by the Federal Reserve in December, supporting the dollar and making emerging market currencies less attractive.
The movement highlights the challenges facing the Indian currency as domestic economic conditions improve but global financial developments continue to influence investor sentiment.
US dollar strength puts pressure on rupee
The US dollar remained firm against major global currencies on Thursday, supported by rising expectations of tighter monetary policy in the United States.
The dollar index, which measures the American currency against a basket of six major currencies, rose 0.12% to 103.03 during early trading.
Recent US inflation figures have raised concerns that price pressures in the world’s largest economy remain persistent. This has prompted investors to reassess their expectations of the Federal Reserve’s interest rate decisions.
When US interest rates rise or are expected to remain higher for longer, global investors often shift towards dollar-denominated assets in search of better returns. Such movements can increase demand for the dollar and put pressure on emerging market currencies, including the Indian rupee.
Higher US Treasury yields have added to the pressure by making American government securities more attractive to international investors.
Market participants are therefore closely monitoring developments in the US economy, particularly inflation trends, employment data and signals from Federal Reserve policymakers.
Falling crude oil prices offer some relief
Despite the pressure from a stronger dollar, the decline in international crude oil prices has provided some relief to the Indian currency.
Brent crude, the global oil benchmark, was trading 1.10% lower at $91.74 per barrel in futures trading on Thursday.
Lower crude prices are generally favourable for India because the country depends heavily on imported oil to meet its energy requirements. Since crude purchases are largely settled in US dollars, higher oil prices increase India’s import expenditure and demand for foreign currency.
A sustained decline in crude oil prices can help reduce the country’s import bill, ease pressure on the current account deficit and support the rupee.
The recent movement in oil prices has therefore emerged as an important factor influencing the domestic currency’s performance.
However, forex traders remain cautious because geopolitical developments and changes in global energy demand could trigger fresh volatility in crude prices.
Foreign investor inflows support domestic currency
Strong foreign investment into Indian equities has also helped limit the rupee’s losses.
Foreign institutional investors (FIIs) purchased Indian equities worth ₹12,563.33 crore on Wednesday, according to exchange data. The sizeable buying indicates improving foreign investor participation in domestic financial markets.
Foreign investment inflows generally support the rupee because overseas investors need to convert foreign currencies into Indian rupees to purchase domestic assets. This increases the supply of dollars in the local foreign exchange market.
The improvement in domestic equity market sentiment has also contributed to the currency’s underlying support.
The BSE Sensex advanced 166.44 points to 82,013.58 during early trading on Thursday. The NSE Nifty 50 gained 55.65 points to trade at 25,316.55.
The positive movement in equities reflects improved investor sentiment, although currency market participants continue to weigh domestic developments against the strength of the US dollar.
Where is the rupee headed?
According to Amit Pabari, managing director of CR Forex Advisors, the rupee’s underlying momentum remains positive, supported by the return of foreign capital and softer crude oil prices.
He indicated that if these favourable conditions continue, the USD/INR pair could move towards 93.50, with 93.00 emerging as another important level to watch.
However, further appreciation in the US dollar could reverse some of the recent gains. The rupee could face renewed pressure, potentially moving towards the 94.10-94.30 range against the American currency.
The outlook will depend on several factors, including global interest rate expectations, crude oil prices, foreign investment flows and the Reserve Bank of India’s approach to managing currency volatility.
Traders will also monitor India’s latest inflation figures for October, as domestic price movements could influence expectations surrounding monetary policy.
For businesses, importers and companies with overseas payment obligations, fluctuations in the rupee-dollar exchange rate remain an important consideration. A weaker rupee increases the cost of importing crude oil, electronics, machinery and other goods, potentially adding to operating expenses.
Exporters, on the other hand, may benefit from a weaker domestic currency because their dollar earnings translate into higher rupee revenues.