Rupee strengthens 0.3% on global dollar weakness

The Indian rupee strengthened sharply against the US$ on Wednesday 20^th October, owing to global weakening of the greenback following a mild plunge in yields on shorter-dated US government bonds and as some foreign banks hurried to sell dollars on behalf of exporters, dealers stated.

The Indian currency opened at Rs. 75.1125 per US$ on Wednesday, 0.3% stronger than Rs. 75.3400 at close on Monday.

With few foreign banks creating a beeline to trade dollars for exporters (noticing the growth in the domestic currency), the Indian rupee on Wednesday was nearing to psychologically significant Rs. 75/US$ 1 mark, touching a high of Rs. 75.0525/US$ 1.

A senior currency dealer with a state-owned bank stated that “It is a bit of a chicken and egg; the primary theme is global US$ weakness and when exporters saw opening near Rs. 75.10/US$ 1, the instant response was to start selling ths US$ to hedge and that is what is taking it to the Rs. 75/US$ 1 level once again,”.

The US$ index, which rates the US currency against six major currency pairs, was previously at 93.70 lower than 93.82 at previous close.

Many dealers, though, do not believe that the overall outlook on the Indian rupee has altered favourably as global crude oil prices remains to mark new record highs, aggravating the outlook on domestic inflation and placing pressure on the import bill. India is a one of the largest importer of the commodity.

Benchmark Brent crude oil prices have soared to their highest levels in 3 years in October owing to concerns of global demand surpassing supply, a worry that has been stressed by large international shortages of coal and natural gas.

Brent crude futures for December delivery on the ICE Futures Europe exchange increased 0.9% to end at US$ 85.08 per barrel on Tuesday, the peak settlement since October 3, 2018. November futures on the New York Mercantile Exchange closed at an over-seven-year high of US$ 82.96 per barrel, up by 0.6%.

A senior dealer with a large foreign bank stated that. “What we are seeing currently is more of a technical reaction which has been augmented by aggressive dollar selling for exporters, but the fundamental view stays to be bearish – Fed will taper and oil prices probably will forge even higher from here, specifically after the recent developments with Russia and natural gas output,”.

So far in the October, the Indian rupee has depreciated ~ 1.2% against the US$.

Government bonds were largely stable, with yield on the 10-year benchmark 6.10%, 2,031 bond unaffected from previous close at 6.39%.

The yield on the benchmark bond did, though, briefly reached the psychologically significant 6.40% mark as the hardening of oil prices increased worries of the Reserve Bank of India tightening interest rates sooner rather than later in order to ward off inflationary pressures.

Even though, with bond yields having risen six basis points on Monday, state-owned banks were said to have entered into the market on Wednesday at what they deemed to be attractive levels, thereby maintaining prices supported.

As the RBI’s monetary policy statement on October 08, yield on the 10-year benchmark paper has climbed 7 basis points, corresponding to a fall in price of around 49 paise.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.