Rupee Strengthens for Fifth Day as Crude Prices and Dollar Ease

The Indian rupee continued its upward trend on Thursday, marking its fifth consecutive session of gains. Currency dealers attributed this positive momentum to declining US Treasury yields and a reduction in crude oil prices. The rupee closed at 95.06 per US dollar, improving from the previous day’s close of 95.16. Throughout the session, it reached a peak intraday level of 94.86 per dollar.

This week, the rupee has appreciated approximately 1.8 percent after nearing its record low in the prior week. Despite this recent rally, the domestic currency has depreciated by 0.26 percent in the current financial year and by 7.35 percent over the past 12 months.

Market sources explained that the Reserve Bank of India (RBI) has actively trimmed its short dollar positions over the last three days, aiming to stabilize the exchange rate. According to Dilip Parmar, senior research analyst at HDFC Securities, the rupee’s rise is supported by easing crude oil prices, the unwinding of long dollar bets, and strong domestic appetite for risk. However, early intraday gains were partially offset due to a widening trade deficit and robust dollar demand from importers.

Looking ahead, dealers anticipate fresh foreign capital inflows related to the upcoming initial public offering (IPO) of Jio Platforms, expected to enter the market starting Monday. Additionally, the Fairfax deal may attract between $6 billion and $7 billion, which could push the rupee toward a range of 94 to 94.50 per dollar.

On the international front, the US dollar index retreated from an 18-month high to about 102, pressured by a sharp decline in US Treasury yields. The market has reduced expectations of a Federal Reserve interest rate hike this month following cautious remarks from Fed officials, despite stronger-than-expected inflation data in the United States.

Meanwhile, Brent crude oil prices dropped nearly 2 percent to around $103.78 per barrel on Thursday, down from $106.06 the previous day. This decline came amid reports that the US might relax restrictions on specific Russian oil tankers and as exports from West Asian producers began to recover. Nevertheless, conflict-related risks in West Asia and ongoing tensions between Russia and Ukraine kept crude prices from falling further.

In the domestic currency derivatives market, forward premiums surged to multi-year highs following recent RBI measures aimed at tightening foreign exchange liquidity. These measures included restrictions on forward dollar purchases, which led banks to unwind positions. Dealers noted that banks that usually received forward premiums have ceased to do so over the past three days, driving premiums sharply up.

The one-year implied hedging cost on the rupee climbed to around 4.6 percent, the highest level since January 2022, while the three-month implied cost rose to approximately 7.2 percent. This increase in hedging costs poses greater expenses for importers and companies with foreign currency liabilities, even as the spot rupee rate remained close to 95 per dollar.

Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, explained that the spike in forward premiums is linked to the Foreign Exchange Risk Reserve (FERR) charges imposed by the RBI. The FERR is a mandatory reserve that banks must maintain with the central bank for certain foreign exchange derivative contracts involving the Indian rupee. These rules affect how banks hedge currency risks related to their assets and liabilities denominated in foreign currency.

The recent movements in the rupee and forward markets highlight the interplay between global economic factors, domestic monetary policy, and market sentiment. The RBI’s interventions and evolving international conditions continue to influence India’s foreign exchange environment, affecting trade, investment flows, and corporate hedging strategies.