Rupee Maintains Range Amid 0.16% Dip in Dollar Index

The Indian Rupee started the trading week under pressure, falling 4 paise against the US currency in initial Monday trade. The home unit was seen tapering at ₹85.72, fluctuating within a tight band after opening at ₹85.61. This initial softness finds its basis as market players minutely study the impact of shrinking interest rate differentials, a fallout of the Reserve Bank of India's (RBI) recent decisions, combined with the ongoing fear of high crude oil prices.

Only last Friday, the Rupee had shown a significant rising trend, going up 11 paise to end at ₹85.68 against the American dollar. The appreciation was mainly due to the Reserve Bank of India's calculated move to cut the repo rate by a more-than-expected 50 basis points, a major move to spur economic growth. But the short-term gain given by this bold rate cut seems to be losing steam in recent trading sessions.

Foreign exchange traders are closely monitoring key indicators, noting that while the rupee initially benefited from the RBI's dovish stance, the recent aggressive rate cut has narrowed the interest rate differential with global peers.One analyst noted that the aggressive rate cut is likely to exert downward pressure on the rupee and diminish the relative appeal of Indian assets. They added that changes in interest rate parity have become a key driver of capital flows and the rupee’s overall direction.

In addition, the higher crude oil prices are still looming over the Rupee's future. Brent crude, the international benchmark, had its prices surge 2 per cent to $66 per barrel, mainly on account of heightened Russia-Ukraine tensions. As a net oil importer, India is inherently connected to such price hikes with its trade deficit. A rise in crude oil prices may widen India's trade deficit, making the rupee more vulnerable in the near-to-medium term. Even though Brent crude subsequently edged down marginally to $66.43 per barrel in futures trading, the root geopolitical tensions and their effect on the supply of oil are a serious cause of concern.

The dollar index, which measures the strength of the greenback against a basket of six of the major currencies, was down 0.16 per cent at 99.02. While this short-term dip will likely continue for the moment, a larger trend of a rising Dollar Index may still place short-term pressure on the Rupee.

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