Indian Rupee Poised for Best Weekly Gain in Two Years Amid Strong US Dollar Inflows

The Indian rupee posted a modest gain on Friday, capping off a week of notable appreciation. Sustained dollar inflows and strategic repositioning by traders contributed to the domestic currency’s strength, even as regional peers in Asia faced downward pressure.

Weekly Performance and Key Drivers

At 12:16 p.m. IST, the rupee stood at 86.1475 against the U.S. dollar, reflecting a 0.25% daily gain and pushing its total weekly appreciation to 0.72%. This marks the rupee’s best weekly performance in nearly two years, underscoring growing investor confidence and strong foreign exchange inflows into Indian markets.

Much of the rupee’s momentum has been attributed to inflows facilitated by foreign banks and the reversal of speculative long-dollar positions. Currency traders observed that prominent foreign banks were persistently active in the dollar/rupee market, absorbing demand and adding liquidity throughout the week.

“This week saw significant flows that large foreign banks were clearly privy to. They've consistently been on the offer side of dollar/rupee trades,” said a currency trader at a local bank.

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Potential Link to RBI's Upcoming FX Swap

Market participants suspect that the inflows are related to dollar fundraising ahead of the Reserve Bank of India's upcoming foreign exchange (FX) swap next week. FX swaps are often used by the central bank to manage liquidity and influence currency dynamics. The anticipation of such operations often prompts proactive positioning by banks and institutional investors.

The same trader noted, however, that while the rupee has rallied, it is likely to encounter stiff resistance around its current levels. “It may not be able to break through easily unless there is a substantial change in fundamentals or a continuation of strong inflows,” the trader added.

Impact of FTSE Rebalancing on Currency Movement

Adding to the rupee’s tailwinds was a notable equity-related inflow stemming from the rebalancing of the FTSE All-World Index. The adjustment, which takes effect from Friday, is expected to bring in approximately $1.5 billion in foreign investment into Indian equities.

Such inflows not only boost the stock market but also directly support the local currency by increasing the demand for rupees, as foreign investors convert their dollars to participate in Indian markets.

“FTSE’s rebalancing activity has clearly played a role in cushioning the rupee from broader regional weakness,” said another market analyst. “In scenarios where other Asian currencies are falling, equity inflows like this help differentiate the rupee.”

Regional Currency Trends and Global Influences

While the Indian rupee was buoyant, the majority of other Asian currencies posted losses on Friday. This regional divergence is indicative of broader investor uncertainty, particularly concerning the direction of U.S. trade policies and the health of the U.S. economy.

The dollar index, which tracks the greenback against a basket of major currencies, saw a tentative rise, driven by cautious optimism around upcoming U.S. economic data releases. These include indicators on inflation, jobless claims, and GDP growth, all of which could influence Federal Reserve policy decisions.

“Most Asian currencies are under pressure due to ongoing concerns over U.S.-China trade frictions and the implications of sticky inflation in developed markets,” said a regional economist. “However, India’s strong macroeconomic fundamentals and positive investor sentiment are offering some insulation.”

Outlook for the Indian Rupee

Looking ahead, the rupee's trajectory will depend on a mix of domestic and global factors. Key among them will be the Reserve Bank of India's FX swap strategy, capital market activity, inflation trends, and potential policy moves by the U.S. Federal Reserve.

India's trade deficit, foreign reserves status, and corporate earnings season are also expected to play a role in influencing foreign investor sentiment. Moreover, if geopolitical tensions rise or global commodity prices spike, the rupee may once again come under pressure.

Despite the strong weekly performance, market participants remain cautiously optimistic. “The rupee is in a favorable position, but there are several external headwinds that could alter the landscape quite quickly,” said an FX strategist at a multinational bank.

In summary, the Indian rupee outperformed many of its Asian peers this week, helped by strong foreign inflows and strategic positioning ahead of a key central bank operation. While short-term resistance levels may limit further appreciation, the underlying sentiment remains positive—provided supportive global and domestic conditions persist.

As markets turn their attention to global macroeconomic signals and policy cues, the rupee’s resilience will likely continue to be tested, making the coming weeks crucial for both traders and policymakers.