The Indian rupee climbed to a two-month high on Thursday after a massive wave of overseas fundraising through special measures exceeded market expectations, strengthening the currency’s outlook as renewed U.S.-Iran conflict pushes crude prices higher and contributes to a global bond selloff.
The rupee opened at 94.30 per dollar, its highest level since late June, compared with Wednesday’s close of 94.97. The currency has gained more than 1% this week, making it one of Asia’s best-performing currencies.
The sharp move follows the Reserve Bank of India’s disclosure on Wednesday that India had attracted $136.4 billion through special foreign-currency mobilisation measures introduced in June. The inflows were far larger than expected, with most coming through non-resident deposits and smaller amounts from external commercial borrowings and overseas borrowings.
The scale of the inflows is expected to provide another substantial boost to India’s foreign-exchange reserves, which reached an all-time high last month. The additional dollar cushion gives the central bank greater capacity to defend the rupee and absorb external shocks, particularly those caused by movements in oil prices.
The stronger position has also increased the RBI’s flexibility in managing movements in the currency. Kunal Sodhani, head treasury of Shinhan Bank, said the inflows “materially strengthen” the RBI’s hand, giving the central bank considerably more room to resist both excessive depreciation and excessive appreciation.
The additional reserves could prove particularly important as crude prices rise again following renewed strikes between the United States and Iran. Brent crude has climbed 7% this week to its highest level since late July, increasing the pressure on India as an oil-importing economy.
Higher oil prices threaten to widen India’s trade deficit and add to inflationary pressures. The greater availability of foreign currency therefore provides the RBI with additional capacity to manage the impact of higher import costs and potential pressure on the rupee.
The currency’s gains are nevertheless taking place against a challenging global backdrop. Expectations that the U.S. Federal Reserve could raise interest rates this month have pushed U.S. Treasury yields higher and kept the dollar broadly supported. Markets are currently pricing the odds of a rate hike at this month’s meeting at two-in-three.
The 10-year U.S. Treasury yield is hovering near its highest level in almost three years, adding to broader pressure across global bond markets and creating a less favourable external environment for emerging-market currencies.
India’s foreign-exchange reserves already stand at a record $729.3 billion and are expected to increase further as the recent inflows are incorporated. At the same time, the RBI’s forward book has reached an all-time high of $137 billion and is also expected to grow.
Nomura said the rise in reserves gives the RBI “ample firepower” despite the expansion of its forward book. The combination of larger reserves and substantial overseas inflows strengthens the central bank’s ability to respond to volatility in currency and external markets.
The inflows are also improving expectations for India’s broader external position. Nomura estimates that the country’s balance of payments will record a surplus of about $66 billion in the current fiscal year, compared with a deficit of $23.6 billion in the previous year.
For the rupee, the immediate effect has been a marked improvement in its position despite higher oil prices, stronger U.S. yields and renewed geopolitical pressure. The unprecedented scale of foreign-currency mobilisation has given India a significantly larger reserve buffer at a time when external shocks are once again testing emerging markets.
