- The rupee reached a multi-month high thanks to heavy foreign currency inflows, briefly trading below 94.50/USD
- The RBI's dollar-swap facility brought in $136 billion, largely from $127.2 billion in foreign currency non-resident (FCNR) deposits
- Investors should monitor several factors including oil prices, Federal Reserve policy signals, the sustainability of RBI support, and FPI flows.
The Indian rupee has stayed under 94.50 against the US dollar for three sessions straight, almost hitting its lowest point since late June.
This isn’t just a one-day thing, but it’s part of a broader USD/INR slide that began in late July. The rupee’s appreciation is notable because it’s happening even as crude oil prices, India’s biggest import cost, are climbing.
Where the Rupee Is Drawing Its Strength
Usually, crude oil prices above $95 a barrel hurt India, a country that imports over 80% of its oil. Higher energy prices widen the Current Account Deficit (CAD) and make domestic importers buy more US dollars to pay bills, driving USD/INR higher.
The rupee’s main support comes from strong policy moves by the Reserve Bank of India (RBI). In June, the central bank launched specific steps to attract foreign-currency deposits and borrowings.
These steps included fully covering hedging costs for banks taking three-to-five-year FCNR(B) deposits and offering favorable swap arrangements for external commercial borrowings from public-sector entities.
By the end of August, official figures showed these initiatives brought in about $127 billion from FCNR(B) deposits alone, contributing to roughly $136 billion in total inflows.
Why Strength Persists Despite Rising Oil Prices
Higher oil prices usually mean more dollar demand from refiners and a larger current-account deficit. Brent crude recently neared $97 a barrel, due to rising tensions between the United States and Iran, which raised worries about supplies through the Strait of Hormuz.
But for now, the RBI’s facilitated inflows have offset this pressure. The central bank’s active market participation has absorbed a significant portion of oil-related dollar demand, while the unwinding of short positions against the rupee has contributed to additional dollar supply.
What Investors Should Watch Closely
In the short term, investors will be watching three main things. First, oil prices and any new developments in West Asian tensions are key.
Escalation of tensions around transit routes like the Strait of Hormuz could push crude oil prices toward $100 per barrel, potentially impacting India’s trade balance.
Next, US monetary policy will matter. The Federal Reserve’s September meeting and upcoming inflation data, especially, will shape the dollar’s broader movement and how markets view risk assets. Stronger US economic data or a more hawkish stance from the Fed could lead to a rapid reversal of recent gains for emerging market currencies.
Finally, the RBI’s net short forward dollar position, currently around $137 billion, has over $22 billion in maturities coming up in the next few months. Handling these maturities might require the central bank to buy dollars, which would naturally limit the rupee from appreciating further.
The RBI’s FCNR(B) deposit scheme has channeled over $130 billion in dollar inflows since June. It’s now helping offset the dollar demand sparked by high oil prices and crude tensions.
The rupee’s recent gains could reverse in the coming months if crude oil prices stay stubbornly above $95, current account deficits widen, or temporary FCNR swap inflows conclude.