The Indian rupee rose 37 paise this week, helped by a drop in US bond yields and stable oil prices. Despite this, investors remain cautious as foreign institutional investors have withdrawn over $19 billion from India so far this year. This ongoing capital selling creates uncertainty about whether the rupee can sustain its recovery in the coming months.
The Indian rupee recently closed at 95.59 against the US dollar, marking a recovery of 37 paise for the week. This short-term relief comes after the currency had hit a two-month low of 96.10, providing a brief respite for the Indian market. Two main factors helped the rupee recover: a decrease in US government bond interest rates and a slight cooling in global oil prices.
Interest rates on US 10-year Treasury bonds fell to 4.93 percent from recent highs above 5 percent. When these interest rates drop, the US dollar typically weakens against other currencies, which helps the rupee. At the same time, crude oil prices stabilized as supply increased, specifically with Saudi Arabia ramping up its exports. Since India imports a large portion of its oil, lower energy costs help reduce the country's total import bill, which is positive for the currency.
However, the outlook remains challenging due to the persistent selling by foreign investors. Data shows that foreign institutional investors (FIIs) sold roughly $600 million worth of Indian stocks and bonds in the past week alone. With outflows totaling $3.1 billion in September, the total amount pulled out by foreign investors for the year has crossed the $19 billion mark. This constant selling acts as a heavy anchor, preventing the rupee from gaining significant ground.
For investors, the direction of the rupee is important because it impacts many Indian companies. Firms that rely heavily on imports, such as oil refiners, consumer electronics, or gold jewelers, often struggle when the rupee is weak because their raw material costs rise. Conversely, companies with significant debt in US dollars face higher repayment costs when the rupee loses value. Investors should watch the dollar index, which tracks the strength of the US dollar against major global currencies. The index is currently near 100.35. If this index fails to rise further, the rupee might see more gains. However, if the dollar index strengthens beyond 100.50, the pressure on the rupee is likely to return, testing the support levels observed earlier this month.