Rupee Set for Strongest Monthly Performance in Over Six Years Amid Inflows and Short Unwinding

Rupee Outperforms Regional Peers with 2% Monthly Rally

The Indian rupee is on course to record its best monthly performance since November 2018, bolstered by robust foreign portfolio inflows and a significant reduction in bearish bets. After spending months near record-low levels, the rupee has surged by over 2% in March, outperforming major regional currencies.

As of March 27, the rupee was trading at 85.5875 per U.S. dollar, marking a 0.2% intraday gain. The rally is largely attributed to persistent dollar inflows from foreign investors and active selling of the U.S. dollar by both local and international banks.

• Rupee up 2% in March, outperforming regional currencies.

• Trading near 85.58 per U.S. dollar, recovering from record lows in mid-February.

• Foreign and domestic banks engaged in U.S. dollar sales, aiding the rupee’s strength.

Foreign Portfolio Inflows Drive Currency Strength

One of the primary catalysts behind the rupee’s strong recovery has been the reversal of foreign portfolio flows. After witnessing sustained outflows since October 2023, investor sentiment appears to have shifted in favor of Indian equities and bonds.

On March 26, foreign investors purchased over $1.2 billion in Indian equities, bringing the total net inflows over the past six trading sessions to $6 billion. This renewed interest in the Indian stock market has significantly contributed to the rupee’s rally.

• Foreign investors bought $6 billion in Indian equities over six sessions.

• March has seen $3 billion worth of inflows into Indian bonds.

• Investor sentiment has improved ahead of expected rate cuts in April.

Short Unwinding Accelerates Rupee’s Recovery

Market participants also attribute the rupee’s strength to short covering on the USD/INR pair. Traders note that the currency’s rally gained momentum as investors unwound long positions on the U.S. dollar after custodial inflows began hitting the market.

A senior trader at a leading foreign bank stated,
“It appears that longs on USD/INR have been exiting after custodial inflows started to hit, contributing to the rupee’s sharp recovery.”

Indian Bond Market Sees Strong Foreign Demand

Apart from equities, India’s bond market has also benefited from foreign investor interest. So far in March, overseas investors have poured $3 billion into Indian government and corporate bonds, in anticipation of a potential rate cut by the Reserve Bank of India (RBI) in April.

The Indian bond market is gaining traction among global investors, particularly ahead of India’s inclusion in the JPMorgan Emerging Market Bond Index later this year. Analysts suggest that once India formally joins the global bond index, further inflows are expected, providing additional support to the rupee.

• $3 billion worth of inflows into Indian bonds in March.

• RBI’s expected rate cut in April adds to investor optimism.

• India’s bond market continues to attract foreign capital ahead of JPMorgan Index inclusion.

Global Trade Developments Could Impact Rupee Momentum

Despite the rupee’s strong performance, global trade tensions remain a key risk factor. The White House is set to announce new reciprocal trade tariffs on April 2, which could have implications for India’s trade dynamics.

To mitigate the impact of potential U.S. tariffs, India is reportedly seeking to cut duties on over half of its U.S. imports, signaling a proactive approach to trade negotiations.

DBS Bank cautioned in a note:
“Any adverse or aggressive tariff announcement will limit the room for further rupee gains.”

• U.S. set to announce new trade levies on April 2.

• India looking to cut tariffs on more than half of its U.S. imports.

• Escalating trade tensions could slow rupee appreciation.

Will the Rupee Sustain Its Gains?

While short-term indicators suggest continued rupee strength, market participants remain cautious about external factors, including global trade policies, Federal Reserve rate decisions, and India’s own policy stance.

With rising foreign inflows and short unwinding, the rupee has made a remarkable recovery from its February lows, but upcoming economic events could determine its trajectory in the months ahead.