Key facts
- The Indian rupee rose against the U.S. dollar for a second straight session.
- Oil prices dropped significantly due to a preliminary U.S.-Iran agreement to end conflict.
- The rupee reached its highest level in five weeks at 94.4625 against the dollar.
- Economists have upgraded India's balance of payments forecasts, expecting a small surplus.
- The Reserve Bank of India's measures to attract dollars are expected to boost inflows.
The Indian rupee appreciated against the U.S. dollar for the second consecutive session on Monday, reaching a five-week high. This gain was driven by a significant drop in oil prices, attributed to a preliminary agreement between the U.S. and Iran to end their conflict and reopen the Strait of Hormuz. The currency's strength was further bolstered by measures implemented by the Reserve Bank of India on June 5 to attract dollar inflows into the economy, even as the central bank maintained its neutral stance on interest rates.
On Monday, the rupee closed 0.4% higher at 94.71 against the dollar, having touched an intraday high of 94.4625, its strongest level in five weeks. The year-to-date decline of the rupee has narrowed to 5.6%, a significant improvement from its record low of nearly 97 per dollar reached last month.
Traders anticipate a more supportive near-term outlook for the rupee, citing lower oil prices and the expected impact of the central bank's initiatives to attract dollar inflows. Victor Roy, head of treasury at CTBC Bank, noted that while the end of the conflict is positive, the rally might not be one-sided, with the currency potentially moving towards 93.25 in the near term.
Brent crude futures fell over 5% to approximately $83 per barrel, a development beneficial for India, which imports nearly 90% of its oil. Economists have revised their forecasts for India's balance of payments, now projecting a small surplus instead of a large deficit, due to these factors and the RBI's actions. They also suggested the central bank might leverage the rupee's strength to reduce its substantial FX forward book, which had reached a record $104 billion in March.