Bears Retreat as Inflows Propel Indian Rupee to Near Two-Month High

The Indian rupee surged to nearly a two-month high on Thursday, buoyed by foreign banks selling dollars and the unwinding of bearish bets, supported by seasonal inflows.

The currency touched an intraday peak of 86.2075, its highest level since January 24, marking a 1.2% appreciation over the past seven trading sessions. It was last quoted at 86.29, reflecting a 0.2% gain for the day.

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Market participants suggest that the rupee’s recent uptrend has been primarily driven by foreign banks offloading dollars, likely on behalf of their corporate clients. This trend has been further supported by seasonal factors, as March typically sees a rise in corporate transactions related to intercompany loans and profit repatriation.

Although specific inflows have not been identified, historical patterns indicate that multinational corporations often transfer funds across borders toward the end of the financial year, which strengthens demand for the rupee.

The recent inflows also appear to have prompted the unwinding of ‘structural’ long dollar/rupee positions in both the onshore over-the-counter market and the non-deliverable forward market, adding further strength to the Indian currency, according to a Mumbai-based currency trader.

This marks a notable turnaround for the rupee, which had been under sustained pressure until mid-February due to equity outflows and concerns over slowing domestic economic growth. The revival of the rupee has provided a much-needed boost to investor sentiment, with market participants now watching how long this rally can be sustained.

WEAKENING DOLLAR ADDS TO RUPEE’S GAINS

Beyond domestic factors, the rupee’s gains have been further supported by a declining U.S. dollar, which has been under pressure amid concerns over an economic slowdown in the United States.

The Federal Reserve on Wednesday revised its 2025 GDP growth projections downward while simultaneously increasing its inflation expectations. These developments have raised doubts about the strength of the U.S. economy, prompting a selloff in the dollar.

The dollar index, which tracks the greenback against a basket of major currencies, is currently near its lowest level this year. Investor confidence in the U.S. economy has been further rattled by apprehensions surrounding President Donald Trump’s tariff policies, which could weigh on global trade.

Fed Chair Jerome Powell stated on Wednesday that uncertainty in the economy is “unusually elevated”, referencing Trump’s aggressive tariff policies and their potential impact on global markets.

Speaking at a press conference following the Fed’s policy meeting, Powell confirmed that the central bank decided to hold interest rates steady, as widely expected. However, policymakers also projected two rate cuts for the year, consistent with their December forecast.

Read more on about US Fed Meeting

MARKET OUTLOOK: WHAT’S NEXT FOR THE RUPEE?

While the recent appreciation in the rupee is a positive development, analysts caution that external risks remain. The Indian currency’s future trajectory will likely be influenced by:

• U.S. Federal Reserve Policy: If the Fed signals more aggressive rate cuts, the dollar could weaken further, indirectly supporting the rupee. However, if inflation remains persistent, the Fed may adopt a more cautious stance, limiting the rupee’s upside.
• Oil Prices: India is a major importer of crude oil, and higher global oil prices could exert renewed pressure on the rupee by increasing the country’s trade deficit.
• Geopolitical Risks: Ongoing geopolitical tensions, such as conflicts in Eastern Europe or the Middle East, could create volatility in global currency markets, potentially impacting the rupee’s performance.
• Foreign Investment Flows: A rebound in foreign institutional investments (FIIs) into Indian equities and debt markets would further strengthen the rupee, while outflows could lead to renewed depreciation.
   

In the near term, traders expect 86.00 to act as a key support level for the rupee, with resistance seen around 86.50-86.75 if dollar demand picks up. The upcoming release of India’s inflation data and trade figures will also provide additional direction for currency markets.

For now, the rupee remains in a strong position, benefiting from both domestic and global tailwinds. However, market participants remain cautious, keeping a close eye on evolving economic trends and global financial developments.