Rupee Surges to Seven-Month High Amid Strong Foreign Inflows and Dollar Weakness

The Indian rupee extended its rally on Friday, 2 May 2025, breaching the ₹84 per US dollar threshold to trade at 83.78-a seven-month high for the currency. The rupee appreciated by 71 paise after a robust opening at 84.09, building on its best single-day gain in nearly two-and-a-half years in the previous session. This marks a significant rebound from its record low of 87.95 per dollar on 10 February 2025, with the currency gaining 2% in March and 1.16% in April.

Sustained Foreign Inflows Drive Appreciation

The rupee's upward momentum has been largely attributed to sustained foreign portfolio inflows into Indian equities. Foreign institutional investors have been net buyers for 11 consecutive sessions, the longest such streak in two years. Additionally, increased hedging activity by exporters and a reduction in short positions against the rupee have contributed to its strength. On April 30, the rupee reached its highest level of the year, appreciating 0.5% to ₹84.78 against the US dollar.

Dollar Weakness and Oil Prices Influence Currency Dynamics

The US dollar index has been on a downward trajectory, declining nearly 4.5% in April, marking its third consecutive monthly fall. This weakness has provided a favourable backdrop for emerging market currencies, including the rupee. Oil prices opened higher on Friday, with Brent crude rising to $62.59 per barrel and WTI climbing to $59.71, as benchmarks hovered near the key $60 level. The uptick in crude adds to pressure on the Indian rupee, however the current range remains a positive for the rupee. Lower oil prices typically support the rupee by reducing India’s import bill and easing current account pressures.

Geopolitical Tensions and Market Sentiment

Geopolitical tensions in the region, particularly between India and Pakistan, have introduced additional uncertainty into the markets. Following a recent militant attack in Kashmir, the Indian government has granted the armed forces "complete operational freedom," raising concerns about potential escalations. Such developments can influence investor sentiment and impact currency movements.

Outlook: Monitoring Key Indicators

Market participants are closely watching upcoming US economic data, including non-farm payroll figures, for cues on the Federal Reserve's policy stance. Any indications of continued rate hikes could strengthen the dollar further, affecting emerging market currencies like the rupee.

While the rupee has shown resilience amid various challenges, its trajectory will depend on a combination of global economic indicators, commodity prices, and geopolitical developments. 

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