Rupee’s Future: Impact of Foreign Investments and Middle East Tensions

Analysts from the Union Bank of India predict that the Indian rupee will stay near its current levels with a positive outlook. This is due to ongoing foreign portfolio investment (FPI) inflows and a generally weaker dollar. However, rising tensions in the Middle East could put pressure on the rupee, especially if dollar outflows increase due to geopolitical uncertainties.

Technically, experts suggest that the rupee may find support at Rs83.76, with strong resistance around Rs83.99. If these levels are breached, the currency could test Rs84.16, a level last seen in non-deliverable forward (NDF) markets.

In the last week of September, the rupee gained about 0.66% from its all-time low on September 12 (Rs83.99) to Rs83.4350 by September 23. This was mainly due to the US Federal Reserve’s significant 50 basis points rate cut during the September Federal Open Market Committee (FOMC) meeting, along with strong FPI inflows. The rate cut, a weakening dollar, and softened US Treasury yields helped the rupee reach levels not seen since June 2024.

Despite these gains, the rupee’s month-over-month performance was modest, with an increase of just 0.08%. The dollar index fell to 100.16, while the 10-year US Treasury yield eased to 3.60%, prompting appreciation across global currencies, including those in emerging markets like India.

FPI inflows, totaling around USD 14 billion in September, the highest monthly inflow in 2024, played a key role in the rupee’s recovery. These inflows provided crucial support to the domestic currency, allowing it to break past its earlier range and touch levels last seen in July. However, the rupee’s volatility remained weaker compared to other Asian currencies.

India, as a major oil importer, is sensitive to global crude oil price fluctuations, which affect the country’s current account dynamics. Recent geopolitical tensions, particularly in the Middle East, have driven oil prices higher, putting renewed pressure on the rupee. Consequently, the rupee retraced from its recent gains, trending back towards its previous lows.

In the final week of September, the rupee traded within a volatile range, moving between Rs83.4350 and Rs83.8125. The main driver was the start of the rate cut cycle by the Fed, expected to influence flows into high-yielding emerging market assets like India.

Looking ahead, the interest rate differential between the US and India is expected to widen, as the Fed continues its rate-cutting cycle following the September FOMC meeting. Meanwhile, the Reserve Bank of India (RBI) is likely to maintain its “withdrawal of accommodation” stance in its October policy review, largely due to persistent food inflation. This differential could attract more FPI inflows, lending further support to the rupee.