Indian Rupee Gains Strength Amid Strong Inflows & RBI’s Support

Indian Rupee Gains Strength as Inflows Continue and RBI Signals Support

The Indian rupee has shown resilience, gaining strength against the U.S. dollar. Strong foreign inflows and the Reserve Bank of India’s (RBI) policy stance have influenced its movement. Meanwhile, bond yields are expected to decline further as market sentiment remains positive.

Foreign Inflows Drive Indian Rupee’s Strength

The Indian rupee appreciated by 1.2% last week, reaching 85.9725 per U.S. dollar, marking its best weekly performance in two years. This rally was fueled by continuous dollar inflows from foreign banks and corporate repatriations. March typically sees an increase in such inflows, as businesses adjust their financial positions before the fiscal year ends.

Traders are closely watching whether these inflows will persist this week. If they continue, the rupee may sustain its gains or even appreciate further. However, the RBI may intervene to rebuild its reserves and manage the currency’s appreciation.

RBI’s Role in Stabilizing the Rupee

Market analysts believe that the RBI might step in at some point to regulate the rupee’s movement. Anil Bhansali, head of treasury at Finrex Treasury Advisors, suggests that the rupee could strengthen further, possibly touching 85.70-85.75 per U.S. dollar. He advises businesses to hedge their short-term dollar payables at those levels to mitigate risks.

Additionally, traders are keeping an eye on the U.S. dollar index and Treasury yields. The dollar index has been declining due to concerns about a potential U.S. economic slowdown. Economic data from the U.S., including services and manufacturing reports, will provide further insights into global market trends.

Bond Yields Expected to Decline Further

The Indian bond market also saw notable movements last week. The benchmark 10-year bond yield closed at 6.6249%, reflecting a 7-basis-point drop. This was its most significant weekly decline in four months.

Several factors contributed to the decline in bond yields:

• Robust demand for state debt supported investor confidence.

• The RBI’s surprise announcement of a third debt purchase auction this month provided further stimulus.

• The Federal Reserve’s dovish stance influenced global bond markets.

• The rupee’s appreciation improved market sentiment.

The RBI plans to buy 500 billion rupees ($5.82 billion) worth of bonds on Tuesday. This is part of its broader strategy to inject liquidity into the banking system. So far, the central bank has infused over 5.50 trillion rupees through bond purchases, FX swaps, and early-April maturity repos.

Lower Inflation Raises Rate Cut Expectations

Recent data showed that India’s retail inflation fell to 3.61% in February, the lowest since July 2024. This was a significant drop from 4.26% in January. The decline in inflation has led market participants to anticipate another interest rate cut by the RBI in April.

ICICI Securities Primary Dealership predicts that the RBI could lower rates by 75-100 basis points in the coming months. Analysts suggest that the Monetary Policy Committee (MPC) may adopt a more accommodative stance to reinforce liquidity and support economic growth.

Conclusion

The Indian rupee’s strength is largely driven by continued inflows and the RBI’s supportive measures. Traders should monitor the central bank’s actions, U.S. economic indicators, and bond market trends for future currency movements. Meanwhile, declining bond yields and lower inflation have set the stage for possible rate cuts, making India’s financial markets an area of interest for global investors.

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