Indian Rupee Strengthens on Cheaper Oil and Capital Inflows

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Improving Outlook for the Rupee

Commerzbank analysts Charlie Lay and Dr. Henry Hao report that the Indian Rupee (INR) has seen a more favorable backdrop as declining Oil prices and renewed foreign capital inflows have eased pressure on India’s balance of payments. The USD/INR pair has been trading around 94.40, with the Rupee standing out as the strongest Asian performer against the US Dollar in June. According to the analysts, robust foreign exchange reserves and policy measures aimed at encouraging inflows are likely to keep USD/INR near the lower side of its 94-96 range observed in recent weeks.

Support from Lower Oil Prices and Inflows

“The outlook for INR has improved in recent weeks as lower crude oil prices and renewed foreign capital inflows have helped to ease pressure on India’s balance of payments. USD/INR held steady last week and was slightly lower at around 94.40 after falling by 0.8% the previous week.”

“So far in June, INR has recovered the most among Asian currencies vs USD, up 0.6%, followed by PHP by 0.5%. This was largely driven by the sharp drop in oil prices following the recent reopening of the Strait of Hormuz.”

The analysts highlight that the fall in crude prices has eased worries over India’s energy import costs and the inflation backdrop, while simultaneously lifting sentiment toward Indian assets. They also point to the role of India’s foreign exchange stockpile in supporting currency stability.

Reserves and Trading Range

“Lower crude prices have reduced concerns over India’s energy import bill and inflation outlook, while also improving investor sentiment towards Indian assets. India’s foreign exchange reserves gained 0.1% to USD672.6bn in the week ending 19 June. It is among the largest in emerging markets and provides RBI with ample capacity to smooth episodes of excessive currency volatility.”

On the outlook for the currency pair, the analysts see a supportive mix of factors that could keep the Rupee anchored within its recent band.

“Looking ahead, the combination of lower oil prices, improving portfolio inflows, and ample foreign exchange reserves should help keep USD/INR near the lower end of its recent 94-96 trading range of the past month. While capital-flow measures should continue to underpin INR, global oil prices remain the single most important determinant of the rupee’s near-term outlook.”

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