Rupee Rallies 1.3% Higher in Historic Week as $136 Billion Influx Powers Sharpest Rally Since July 

Mumbai, Sept 5: After a week of extraordinary volatility, the Indian rupee staged its most powerful rally in nearly six weeks, gaining from the 96-levels to end its 10th weekly loss with a double-digit percentage gain. In the week ending 4 September, the local currency gained more than 1.3% on the back of a record-breaking deluge of foreign currency inflows that surpassed market expectations. The significant comeback for the rupee, which started in midweek, wiped out all losses and made it one of the best-performing currencies in Asia, despite the headwinds from geopolitical tensions and high crude oil prices. 

Rupee Opens Week at 95.64 Before Sliding to 95.55 on August 27 

The week commenced on a subdued note as the currency market resumed trading after a mid-week holiday. The rupee had opened at 95.64 against the US dollar on Monday, 24 August and slipped to 95.44 by Tuesday, 25 August. On Thursday, 27 August, the rupee opened at 95.44, largely flat compared with Tuesday’s close of 95.41. However, the currency pared initial gains and settled lower by 11 paise at 95.55 (provisional) against the US dollar on Thursday. 

At the interbank foreign exchange market, the rupee opened at 95.50, touched an intraday high of 95.40 and a low of 95.56, finally closing at 95.55. Forex traders attributed the decline to broad strength in the American currency in overseas markets and weak domestic equities—the Sensex fell 539.35 points to settle at 76,933.59, while the Nifty dropped 116.90 points to 24,090.85. 

Crude Below $90 Offers Respite as Dollar Strength Overwhelms Support 

Easing crude oil prices provided a measure of support to the rupee, though it proved insufficient to offset the broader dollar strength. Brent prices fell below the $90 mark for the first time in several sessions amid continuing discussions between Iran and Oman regarding a temporary shipping corridor through the Strait of Hormuz. “While no final agreement has been reached, the fact that negotiations are continuing has reduced fears of a prolonged disruption to global oil supplies,” forex traders noted. 

The dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading at 99.21, higher by 0.05%. Brent crude was trading higher by 0.61% at $88.38 per barrel in futures trade. The combination of a strong dollar and weak domestic markets ultimately weighed on the rupee, negating the positive impact of lower oil prices. 

Rupee Explodes 67 Paise to 94.30 on September 3 as $136 Billion Influx Shocks Markets 

The currency’s fortunes reversed dramatically on Thursday, 3 September, as the rupee recorded its sharpest single-day gain since 27 July. The Indian rupee opened 67 paise higher at 94.30 against the US dollar, reaching its strongest level in two months. The opening level of 94.30 was the rupee’s highest since late June. 

The trigger was a staggering inflow of foreign currency that caught markets entirely off guard. India attracted $136.38 billion through special foreign-currency measures introduced by the Reserve Bank of India in June, according to RBI figures. The amount was substantially higher than the $80 billion to $90 billion that economists had predicted. The central bank’s foreign-currency deposit programme aimed at the diaspora constituted the majority of these inflows. 

Foreign Currency Non-Resident (FCNR) Bank deposits accounted for $127.23 billion of the total—roughly two-and-a-half times what the celebrated 2013 scheme raised. External commercial borrowings brought in $3.89 billion, while overseas foreign-currency borrowings added $5.26 billion. Including overseas foreign-currency borrowings and external commercial borrowings, total inflows under the measures reached $136.377 billion. 

Forex Reserves Hit Record $740.80 Billion as RBI Gains Unprecedented Firepower 

The massive inflows translated directly into a dramatic expansion of India’s foreign exchange reserves, providing the central bank with formidable ammunition to defend the currency. India’s foreign-exchange reserves surged by $11.47 billion to a record $740.80 billion in the week ended 28 August, according to RBI data released on Friday. This followed a $12.422 billion increase to $729.328 billion in the week ended 21 August. The two consecutive weeks of gains added nearly $23.9 billion to the country’s external buffer. 

“The overseas inflows are likely to push up the foreign reserves stock to a fresh high past $750 billion in the coming weeks, providing considerable firepower to defend the currency,” said DBS Bank senior economist Radhika Rao. Veteran foreign exchange consultant KN Dey added: “The 93.80 level during September can’t be ruled out as we have got certain reserves muscles now”. 

The rupee closed at 94.4850 against the US dollar on Thursday, marking a ten-week closing high. The currency recorded its sharpest daily gain since July 27. According to forex traders, the central bank intensified its dollar sales in recent days to bolster the currency. 

Rupee Extends Winning Streak to Sixth Session, Closes at 94.49 on September 4 

The momentum carried into Friday, with the rupee extending its gains for a sixth consecutive session. The rupee gained 5 paise to 94.46 against the US dollar in early trade, supported by optimism over rising foreign inflows and a rise in risk appetite. At the interbank foreign exchange market, the rupee opened at 94.53 and touched an intra-day high of 94.46. 

The rupee settled for the day higher by 2 paise at 94.49 (provisional) against the US dollar. The currency gained more than 1% over the week, placing it among Asia’s best-performing currencies. On Thursday, the rupee had extended its gaining momentum for the fifth straight session, appreciating 22 paise to close at 94.51. On Wednesday, the rupee settled at 94.73, recording a gain of 22 paise. The local unit gained 27 paise to settle at 94.95 against the US dollar on Tuesday, after rising 21 paise and 2 paise in the preceding two sessions. 

The dollar index was trading at 99.11, higher by 0.21% on safe-haven demand amid renewed US-Iran tensions. Brent crude was trading 0.01% higher at $95.53 per barrel in futures trade, amid escalating US-Iran tensions and fears of disruption to oil flows through the Strait of Hormuz. On the domestic equities front, the Sensex rose 362.57 points to settle at 76,515.43, while the Nifty was up 24.25 points at 23,897.70. Foreign institutional investors offloaded equities worth ₹2,345.87 crore on a net basis on Thursday. 

FCNR Scheme Raises $127 Billion, Far Exceeding 2013’s $26 Billion Haul 

The scale of the foreign currency mobilisation under the Reserve Bank of India’s special swap windows represented a landmark achievement. Indian banks successfully raised $127.23 billion through non-resident foreign-currency deposits, according to a statement from the RBI. The last similar initiative, initiated in 2013, garnered approximately $26 billion, making the current mobilisation nearly five times larger. 

According to Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, the special swap facility attracted total inflows of nearly $73 billion as of August 21, with over $65 billion through FCNR(B) deposits alone. “With the final rush into the August 31 deposit deadline and the ECB window open until December, we estimate total flows under these schemes could touch $85 to $90 billion,” Banerjee said. “The inflows have created a formidable war-chest, and it means the rupee’s appreciation potential remains largely unspent”. 

The dollars acquired through the programme were exchanged by banks with the central bank, directly contributing to the nation’s foreign exchange reserves. The measures were introduced in June in response to soaring oil prices that threatened to create a deficit in India’s balance of payments, designed to attract stable dollar inflows as the nation faced rising import costs due to supply chain disruptions related to the US-Iran conflict. 

Crude at $95 and Fed Rate Hike Risks Cap Further Rupee Gains 

Despite the remarkable rally, significant headwinds remained that could limit further appreciation. Brent crude has risen 7% this week and reached its highest level since late July amid renewed conflict between the US and Iran. Higher oil prices can increase India’s import bill because the country depends heavily on overseas crude supplies. 

Expectations of a possible interest-rate increase by the US Federal Reserve have also kept the dollar supported. The probability of a rate increase at the Fed’s September meeting stood at roughly two in three, while the 10-year US Treasury yield was near its highest level in almost three years. 

Forex traders said the rupee was likely to strengthen due to robust foreign capital inflows and active RBI intervention. However, rising crude oil prices and escalating US-Iran geopolitical tensions may cap these gains. “Overall, the FCNR story has given the rupee a strong shot in the arm, but the underlying fundamentals still carry their share of risk. 94.00–94.20 remains a strong support zone. Any negative surprise, especially from the oil front, could pull USDINR back up towards 95.00, 95.50 and eventually 96.00,” said Amit Pabari, CR Forex Advisors MD. 

The rupee’s extraordinary rally this week was driven entirely by the unexpected $136 billion foreign currency influx through RBI’s special swap windows, which pushed forex reserves to a record $740.80 billion. The currency appreciated over 1.3% from 95.55 to 94.49, marking its strongest weekly performance in months. However, elevated crude oil prices near $95 per barrel and heightened US-Iran tensions continue to pose risks. The USD/INR pair is expected to trade in a range of 94.15 to 94.75, with the 93.80 level potentially within reach should inflows continue. 

Source 

• https://rbi.org.in/