Rupee logs best week in over 2 years; here are three major reasons

rupee

Indian rupee has registered a best week in over two years today by rising over 1 percent. This was after it remained under pressure for the few months since last year, which led to heavy intervention by the Reserve Bank of India (RBI) to defend it.

The gains took place in the local currency this week was best in over two years due to global as well as domestic cues.

Indian rupee appreciated to end at 85.9725 against the US dollar from 86.3675 in the previous session.

The local currency rose to a 10-week high of 85.9375 during the session and gained 1.2% in the week. This has been the best level for the rupee since January 9, when it traded near 85.8638 against the US dollar.

Decline in dollar index

Experts are of the view that dollar index, which measures American currency's value against six major global peers, have helped the local currency to appreciate since the start of this month.

Aditi Gupta, Economist at Bank Of Baroda said that Indian rupee has appreciated by 1.5 percent this month alone, with the gains coming largely in the last few sessions. On the other hand, dollar index (DXY) has declined by over 3 percent, due to growth concerns amidst escalating global trade tensions.

According to Bloomberg data, dollar index has fallen over 2.6 percent since start of this. It stood at 103.946 at close of forex market in India, as compared to 106.747 on March 3.

On this fall, currency expert said that earlier market expected that US President Donald Trump policies on tariffs would bring about inflation, but since then he has changed his stance a number of times so market is expecting it to just be a ploy to extract concessions from these countries.

Lower domestic inflation & shrinking trade deficit

India’s retail inflation in February has shown a numbers below the RBI’s medium target of 4 percent and country’s trade deficit numbers has narrowed, which has also supported the Indian rupee to appreciate.

“Rupee also found support from steady foreign debt inflows, range-bound oil prices, lower domestic inflation and a shrinking trade deficit. RBI’s apt and timely liquidity and currency management also has helped in boosting investor confidence which can also explain the rupee’s relative outperformance,” Gupta added.

India’s trade deficit narrowed to $14.05 billion in February, resulting in a rare overall trade surplus of $4.5 billion. The deficit was nearly $23 billion in January. On a year-on-year basis, too, the trade gap in goods was narrower compared to $19.51 in February 2024. The Commerce Ministry said the deficit in February is the lowest since August 2021 due to a decline in imports and exports relatively holding up. While merchandise exports fell 10.9 percent on-year in February to $36.91 billion, goods imports decreased by a larger 16.35 percent to $50.96 billion, provisional data released by commerce ministry on March 17 shows.

India’s retail inflation eased to a seven-month low of 3.61 percent in February, as food inflation moderated below 4 percent for the first time in nearly two years, cementing hopes of a back-to-back rate cut in the upcoming April meeting of the Reserve Bank of India, according to data released by the government on March 12.

The decline in February marks only the third time this fiscal year that inflation has dipped below 4 percent.

“The upbeat economic data and risk-on sentiments also added fuel to recent appreciation,” said Dilip Parmar, a senior research analyst at HDFC Securities.

Foreign investors inflows

The local currency in this week has also got support from the inflows by the foreign investors in the debt as well as equities. According to the CCIL data, foreign investors’ investment in government securities under fully accessible route (FAR) has increased by Rs 7,445.386 crore in this week. Also, foreign institutional investors remained the buyers in Indian equites on March 20 and March 18, by buying stocks worth Rs 3,239.14 crore and Rs 1,462.96 crore, respectively, according to the Moneycontrol’s data.

“Though foreign institutions are sellers in the domestic equity, their pace of selling has been reducing while they remained net buyer in the debt, so far this month,” Parmar added.

Benchmark indices the Sensex and Nifty ended the session on March 21 on an upbeat note, logging in a five-day winning streak. A stronger rupee, abating FII selling and recovery in information technology stocks from day's lows bolstered sentiment.

With the uptick in trade, the Nifty 50 also managed to briefly move past the 23,400-mark for the first time in two months, a move that market experts were largely anticipating. The turnaround for Indian equities seen in the past week was also triggered by changing sentiment among foreign institutional investors turned net buyers in two out of the past three sessions, after a month of relentless selling.

Things to watch out in coming days for rupee

Parmar said that the foreign inflows and sentiments remain the crucial for sustainable upward move for the rupee.

“The central bank is providing guard on both the side so we can see they covering their short at higher level which could limit the gains. One should also eye on the greenback  if it weaken due Trumps policy decision (Mar-a-Lago Accord) then there will be currency war like tariff war,” Parmar added.