Flows, underlying sentiment cushion Indian rupee against Fed-spurred dollar rally

MUMBAI: The Indian rupee’s underlying bias is likely to stay positive on Friday and in the near term, aided by improving flows and sentiment buffing it up against a Federal Reserve-driven dollar rally.

The Indian rupee is seen opening flat to marginally higher on Friday, after settling at 94.3325 per dollar in the previous session.

The currency has climbed 0.8% this week, hitting its highest level in six weeks. Daily flows have turned more constructive for the rupee in recent days, bankers said.

They pointed to a surge in inflows into Indian bonds, a moderation in foreign equity outflows, and more two-way activity from importers and exporters, though activity still tilts more towards hedging by importers.

This marks a shift from the one-way dollar demand, driven largely by importer buying and sustained foreign outflows that had kept the rupee under pressure for several weeks.

India’s steps to attract dollar inflows, alongside a plunge in crude oil prices after the US-Iran peace deal, have helped rebalance flows. A trader at a private bank said that positioning in interbank trade has changed, with a previous focus on buying dips on dollar/rupee being replacedwith being “more opportunistic”, with a willingness to go short. 

Upbeat dollar

The rupee’s rally faces a test from a resurgent dollar after the Fed’s hawkish tilt spurred bets on rate hikes and sentthe dollar index to a one-year high.

Updated interest rate projections showed nearly half of policymakers now expect a hike this year due toconcerns around inflation.

The dollar index hit 100.92 on Thursday and is up 1% this week.

The dollar could draw support from the Fed story, analysts at ING Bank said, with upside risks to US data likely to nudge it higher, while noting that “this is not 2022, and any tightening should be seen as a recalibration, not a cycle.”