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The Indian rupee opened 18 paise higher at 94.56 against the US dollar on Wednesday (November 4), compared with its previous close of 94.74, supported by foreign investor buying in domestic equities and a decline in the dollar index.
The recovery comes amid a correction in crude oil prices and changing investor sentiment ahead of the US midterm election results.
What is driving the rupee's gains, how do these factors influence the currency, and what could determine its movement ahead?
Why is the rupee gaining?
Foreign investor inflows
Foreign investor buying in Indian equities has supported the rupee. Foreign investors purchased more than $700 million worth of Indian shares on Tuesday, taking their net purchases over the past three sessions to around $1.5 billion.
When foreign investors bring dollars into India to invest in equities, they convert the funds into rupees, increasing demand for the domestic currency.
Indian equities have gained around 5% over the past four sessions. The recent weakness in AI-related stocks has also encouraged some investors to shift funds towards Indian equities.
Decline in the US dollar
The dollar index fell 0.3% amid investor positioning around the US midterm election results.
Markets are factoring in the possibility of the Democratic Party gaining control of both chambers of Congress. Analysts at ING Bank said the dollar could face short-term pressure if this happens.
They also noted that concerns about tighter regulation under a Democratic-controlled Congress could weigh on AI stocks, with potential implications for the dollar.
A decline in the dollar index can support emerging market currencies, including the rupee.
Fall in crude oil prices
Brent crude prices plunged nearly 6.5% to around $106 per barrel, according to Rajeev Sharan, Head of Research at Brickwork Ratings.
India is a major crude oil importer, and higher international oil prices increase its import bill and demand for dollars. This can put pressure on the rupee.
A decline in crude prices can ease the import bill and reduce dollar demand, providing support to the domestic currency.
Sharan said the decline in oil prices, along with renewed foreign investor buying, had improved the rupee's near-term outlook.
How does rupee appreciation affect consumers and businesses?
Crude oil and other imports: A stronger rupee reduces the rupee cost of dollar-denominated imports, assuming international prices remain unchanged.Overseas education and travel: Payments for foreign university fees, accommodation and travel become relatively cheaper in rupee terms.Exporters: Companies earning revenue in dollars receive fewer rupees when converting the same amount of foreign currency.Foreign remittances: Families receiving money from abroad get fewer rupees for the same dollar amount.What could determine the rupee's next move?
Crude oil prices, foreign investor flows and movements in the US dollar will remain key factors for the rupee.
Sharan said the currency's gains could remain limited by dollar strength and caution around the US midterm elections. He identified the 94.50-94.70 range as a technical barrier and said the rupee's near-term outlook would improve if crude oil prices remained soft.
-With Reuters inputs
