Indian rupee opened trading on Monday stronger against the US dollar between 87.52-87.56, and that momentum followed gains in the offshore non-deliverable forward (NDF) market. However, currency traders are cautious because it is unclear if this momentum can be sustained in the coming days.
A recently weakened US dollar index and a minor reversal in Brent crude prices have provided some interim support to the rupee. Lower crude prices reduce India’s import bill and help reduce inflationary pressures, while a weaker US dollar will generally be positive for emerging market currencies.
Although still fierce, sentiment is more muted than it was before due to broader macroeconomic concerns and uncertain policy direction.
The Reserve Bank of India (RBI) has been active in offshore and onshore markets to curtail volatility. The RBI has closely monitored currency movements and intervened where necessary so that sharp movements do not disrupt trade flows and investor sentiment.
Market participants remain wary due to concerns about the potential impact of US tariff policies on global trading patterns and inflation. Analysts at MUFG Bank have noted that the new tariffs are already starting to feed into US inflation data, and this makes the upcoming July US inflation report a critical indicator for policymakers and investors.
Expectations are high for a Federal Reserve rate cut in September, with futures markets pricing in approximately a 90% chance of that rate cut. Any shift in this outlook, driven by inflation surprises, could alter capital flows into emerging markets, including India.
Foreign Portfolio Investors (FPIs) have had a mixed interest in Indian assets. On August 7, FPIs sold $629 million of equities, reflecting unease over global and domestic uncertainty. Some funds have come back into the bond market, but inflows into Indian bonds have been limited. This suggests FPIs remain tentative with their bets.
Similar to the broader trend across Asia, the rupee's performance has been enabled by a weaker US dollar and has gained modestly. Most investors remain reluctant to take more positions while they await clarity from central banks and trade negotiators. While the fall in Brent crude and stable US Treasury yields can give some breathing space, the risk of renewed tariff actions remains a concern.
The rupee's recent appreciation highlights the delicate balance emerging markets must strike amid shifting global conditions. Its stability will largely depend on the RBI’s ability to navigate external shocks while safeguarding liquidity and investor confidence. With inflation trends, trade policies, and monetary decisions all in motion, the currency’s trajectory remains uncertain.