The Indian rupee made a significant comeback on Tuesday after the volatility of the last few days. The rupee rose above its all-time low to close at 91.71 (provisional) against the dollar. A fall in the dollar index globally and ongoing Free Trade Agreement (FTA) negotiations between India and the European Union have created a positive atmosphere in the currency market. Experts in the foreign currency market believe that due to the widespread weakness of the dollar, traders chose to turn to the rupee, resulting in support for the currency.
The rupee touched a historic low of around 92 against the dollar on Friday. Then the market was closed on Saturday-Sunday holiday and Republic Day on Monday. As markets reopened on Tuesday, the rupee opened strongly without disappointing investors. A drop in the dollar index, a rally in the domestic stock market and a rise in foreign exchange reserves helped the rupee to take care.
However, not all factors in the market have been favorable for the rupee. Continued selling by foreign institutional investors (FIIs) and rising crude oil prices in the international market limited the rupee's upward momentum to some extent. Experts say that had it not been for these two factors, the rupee could have strengthened further. However, sentiment is likely to remain positive for the rupee in the coming days.
How was the movement of the rupee against the dollar?
It opened at Rs 91.82 in the interbank foreign exchange market on Tuesday. It slipped to 91.90 during the day, but eventually made a strong comeback to close at 91.71 (tentative). This represents an improvement of 19 paise over the previous close. It may be noted that the rupee closed at 91.90 after reaching close to 92 on Friday, creating a negative sentiment in the market.
Will the rupee strengthen further?
According to Anuj Chaudhary, research analyst at Mirae Asset Sharekhan, the Indo-European Union free trade agreement could bolster domestic market sentiment, leading to a modest but sustained appreciation in the rupee. He added that weakness in the dollar index is favorable for the rupee, but factors such as foreign investor selling and global geopolitical tensions could still add pressure. According to his estimate, the USD-INR pair is likely to remain between 91.30 and 92 in the near term.
Market hopes from India-EU trade agreement
On Tuesday, India and the European Union announced the completion of negotiations for a free trade agreement. Under this agreement, several Indian sectors like garments, chemicals and footwear can get duty-free access to the European market. While on the other hand, the European Union will get access to the Indian market at concessional rates in sectors like cars and alcohol. According to officials, this deal is being called the “Mother of All Deals” as it covers a market of nearly two billion people.
Dollar index continues to decline
The dollar index, which measures the dollar's position against six major world currencies, fell 0.12 percent to 96.92 on Tuesday. In the last one week, the index has registered a decline of about 1.7 percent. The dollar is losing its strength in January as well and the index has lost more than 10 percent over the past year.
Impact of crude oil price rise
Crude oil prices have increased again in the international market. Brent crude rose by around 0.35 percent to settle at $65.84 per barrel. While the price of American WTI crude has also jumped by about 0.46 percent. High oil prices put pressure on the currency for an import-dependent economy like India.
Boom again in the stock market
The local stock market also witnessed a positive trend on Tuesday. The Sensex had fallen sharply in the previous week, but closed up 319.78 points at 81,857.48 on Tuesday. The Nifty also rose 126.75 points to 25,175.40. Market experts believe that the announcement regarding the India-EU FTA could lead to more bullishness in the stock market in the coming days.
Forex reserves set a new record
According to the latest Reserve Bank of India data, India's foreign exchange reserves increased significantly by $14.167 billion during the week ended January 16. With this, the total forex reserves have increased to 701.36 billion dollars, which is considered a strong indication for the economic condition of the country.
Foreign investors continue to sell off
NSDL data showed that foreign institutional investors sold around ₹4,100 crore from the Indian stock market on Friday. So far in the month of January, sales by FIIs of around ₹ 36,800 crore have been recorded. However, experts believe that a trade agreement between India and the EU could restore the confidence of foreign investors.
What will be America's next strategy?
After the India-EU agreement, the pressure has increased on the US to strike a direct trade deal with India. Analysts believe that the agreement with Europe will open up new avenues for India's exports, which could reduce its dependence on the US. In such a situation, it may be more beneficial for the US to deal directly with India. Also, trade and energy-related talks are likely to resume between India and Canada in March, which could reshape global trade equations.
Market experts believe that the recent strengthening of the rupee is not just a short-term relief, but structural factors are also at work behind it. India's strong economic growth, stable inflation rate and improved exports have boosted confidence among global investors. Also, the proactive policies of the Reserve Bank of India have played an important role in controlling sudden fluctuations in the currency. If uncertainty in the global market eases and crude oil prices remain stable, the rupee may move in a more stable and stronger direction in the coming period, which will also benefit India's import-export system.
Enmity with India Costly… India's Biggest Deal with EU Slipped Bangladesh-Turkey's Feet- Here's Why
. Source
