Indian rupee rises to 2-week high on US-Iran deal optimism
What's the story
The Indian rupee has made a strong comeback, opening at 95.34 against the US dollar on Monday. This is an improvement from Friday's close of 95.69, marking a gain of 35 paise in early trade and hitting its highest level in nearly two weeks. The recovery comes as concerns over the Iran conflict ease, improving global risk sentiment.
Market confidence
RBI assures support for rupee
Reserve Bank of India (RBI) Governor Sanjay Malhotra's recent comments have also bolstered confidence in the rupee. In an interview with Mint, he said that the RBI would do "whatever is required" to ensure orderly movements in the foreign exchange market. He also suggested that after its recent depreciation, the currency now appears undervalued.
Central bank action
Intervention and oil price drop aid rupee
Malhotra's comments come after two consecutive sessions of aggressive intervention by the central bank. This has helped the rupee recover from last week's record low near 97 per dollar. The currency also mirrored gains in Asian currencies after oil prices fell sharply. Brent crude futures dropped 5% to below $100 per barrel for the first time in over two weeks amid hopes of a US-Iran peace deal.
Economic impact
Oil price drop to ease India's import bill
The decline in oil prices is expected to ease India's import bill, relieve inflationary pressures, and improve the current account deficit. Asian equities rose over 1% on improving risk appetite, while the dollar index remained subdued near 98.99. However, markets may remain volatile amid uncertainty over Iran negotiations, with analysts advising investors not to overreact to headlines given past instances of US-Iran talks breaking down after initial optimism.
Economic challenges
Imported inflation remains a concern
Despite the rupee's recovery on Monday, imported inflation remains a concern. State-run fuel retailers have hiked petrol and diesel prices for the fourth time in May to offset rising crude-related costs. Foreign investor flows also remained weak with NSDL data showing overseas investors sold a net $185.9 million worth of Indian equities and $35 million worth of bonds on May 21 amid global uncertainty.