Why Isn't the Indian Rupee Strengthening Despite a Weak US Dollar?

The Indian rupee has stayed within a narrow trading range despite several favorable global factors, such as a weakening US dollar, declining crude oil prices, and strong foreign institutional inflows (FII) into the Indian stock market.

US Dollar Weakness and Global Impact

The US dollar index, which measures the value of the dollar against other major currencies, has dropped by 5%, falling from 106 to around 101. This decline is driven by expectations of a significant interest rate cut by the US Federal Reserve. While most Asian currencies have strengthened due to the dollar's decline, the Indian rupee has not followed the same trend and remains range-bound.

RBI's Intervention in the Forex Market

Analysts point to the Reserve Bank of India's (RBI) active intervention as a major factor holding back the rupee's appreciation. According to Amit Pabari, MD of CR Forex Advisors, the RBI has been buying US dollars in large quantities, preventing the rupee from gaining value despite favorable conditions.

Pabari also highlighted that one of the reasons for this intervention is India's high trade deficit with China and the strengthening of the Chinese yuan against the US dollar. The RBI's dollar purchases are likely aimed at preventing the rupee from weakening further against the yuan, which could widen India's trade deficit with China.

Dollar Inflows and Stock Market

Jigar Trivedi, Senior Research Analyst at Reliance Securities, noted that the range-bound movement of the rupee continues despite weak crude oil prices and healthy dollar inflows into the Indian equity market. He mentioned that India's weightage in the MSCI Emerging Markets Index has improved, but the RBI's firm control over the currency keeps the rupee from appreciating.

Rupee's Future Outlook

Looking ahead, experts predict that the rupee will continue trading within a narrow range. Pabari expects the rupee to remain between 83.70 and 84.05 in the medium term, with 83.80 acting as a floor and 84 as a stiff resistance point. Only if the rupee moves beyond this range can a clearer trend be established.

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Despite positive global factors, the Indian rupee has remained range-bound due to the RBI's intervention in the forex market. The central bank’s actions, aimed at controlling the rupee’s movement, are likely to keep the currency stable in the near term. Investors will be watching closely to see if the rupee breaks out of its current range.