The Indian rupee lost some ground against the US dollar on Thursday, November 5, after two consecutive sessions of gains, as demand for the American currency in overseas markets put pressure on the domestic unit. The currency depreciated 9 paise to 94.55 against the dollar in early trade, even as falling crude oil prices, a strong rally in domestic equities and renewed foreign investor buying offered some support.
At the interbank foreign exchange market, the rupee opened at 94.36 against the dollar before slipping to 94.55. The decline came after the currency had settled at 94.46 on Wednesday, gaining 29 paise in that session. The latest movement reflects the competing forces influencing the Indian currency, with improving global sentiment providing relief while intermittent dollar demand continues to limit its recovery.
The rupee’s movement comes at a time when Indian financial markets are responding positively to developments surrounding the US midterm elections and the possibility of easing geopolitical tensions in West Asia. However, currency traders remain cautious about the sustainability of the recent recovery.
Why did the rupee fall despite positive market sentiment?
The immediate pressure on the rupee came from the broad strength of the US dollar in overseas markets. Increased demand for the American currency, particularly from banks and market participants meeting their dollar requirements, limited the domestic currency’s gains.
The dollar index, which measures the greenback’s strength against a basket of six major currencies, was trading at 101.22, down 0.34%. Although the index was lower, demand for dollars in the domestic foreign exchange market was enough to push the rupee slightly weaker during early trade.
Forex market participants said the positive performance of domestic equities and softer crude oil prices helped cushion the rupee’s decline. The currency has been particularly sensitive to movements in global energy prices because India imports a substantial portion of its crude oil requirements.
Crude oil prices provide relief
The sharp correction in international crude oil prices has emerged as an important positive factor for the Indian economy and the rupee. Brent crude, the global oil benchmark, fell more than 8% in the previous session, slipping below the psychologically important $100-per-barrel mark.
On Thursday morning, Brent crude futures were trading around $93.64 per barrel, down another 1.04%. The decline followed growing expectations that diplomatic efforts could help ease the US-Israel conflict with Iran.
The Democratic Party’s strong performance in the US midterm elections has also influenced investor expectations. With Democrats gaining control of both chambers of Congress, markets are assessing whether the changed political balance could restrict President Donald Trump’s ability to pursue further military escalation and encourage diplomatic negotiations.
The easing of geopolitical risk has reduced some of the premium previously built into crude oil prices. Brent crude had approached $120 per barrel in late October, raising concerns about India’s import costs and inflation outlook.
For India, cheaper oil is particularly important. The country imports nearly 90% of its crude requirements, making its economy vulnerable to sudden increases in international energy prices. A sustained decline in crude prices could reduce the import bill, ease pressure on the current account deficit and improve the outlook for the rupee.
FII buying and stock market rally support currency
The strong performance of Indian equities has also helped improve sentiment towards domestic financial markets. On Thursday, the Sensex surged more than 1,400 points in early trade, while the Nifty 50 advanced towards the 24,400 mark.
The rally was supported by falling crude prices, positive global cues and renewed foreign institutional investor (FII) participation. Foreign investors purchased Indian equities worth ₹7,284.03 crore on Wednesday, according to provisional exchange data.
Strong foreign portfolio investment flows can improve the availability of foreign currency in domestic markets and provide support to the rupee. However, dollar demand from importers, banks and other market participants can offset some of these inflows.
The rupee’s recent recovery has also followed several measures introduced by the Reserve Bank of India to stabilise the currency amid external pressures. These include steps aimed at attracting foreign currency inflows and managing demand for currency hedging.
US midterm results and global developments remain crucial
The US midterm election outcome has become an important factor influencing currency and commodity markets. Investors are watching whether the change in political balance in Washington could create greater pressure for negotiations over the West Asia conflict.
A possible easing of tensions could improve global trade sentiment, reduce disruptions to energy supplies and lower the financial risks faced by oil-importing economies such as India.
Nevertheless, the rupee continues to face challenges from external factors, including global dollar movements, foreign investment trends and uncertainty surrounding international trade and energy supplies.
What lies ahead for the rupee?
The rupee’s next move is likely to depend on whether crude oil prices maintain their downward trend and foreign investors continue bringing money into Indian markets. Developments in West Asia, demand for the US dollar and the Reserve Bank’s currency management measures will also remain important.
While lower oil prices and improved global sentiment have provided some breathing room, the early trade decline highlights the challenges facing the domestic currency.
