Rupee rises to two-week high against dollar: Factors driving currency’s recovery

The Indian rupee strengthened sharply on Monday (May 25), opening at 95.34 against the US dollar compared with Friday’s (May 22's) close of 95.69, gaining 35 paise in early trade and touching its highest level in nearly two weeks.

The rebound in the currency came as easing concerns over the Iran conflict improved global risk sentiment, while remarks from Reserve Bank of India Governor Sanjay Malhotra boosted confidence around the rupee’s outlook.

In an interview with Mint,

Malhotra said the RBI would do “whatever is required” to ensure orderly movements in the foreign exchange market. He also indicated that after the rupee’s recent depreciation, the currency now appears undervalued.

The governor’s comments followed two straight sessions of aggressive intervention by the central bank, according to traders, helping the rupee recover from last week’s record low near 97 per dollar.

The rupee also tracked gains in Asian currencies after oil prices retreated sharply. Brent crude futures fell 4.6% to below $100 per barrel for the first time in over two weeks amid optimism that the U.S. and Iran could move closer to a peace agreement.

Lower crude prices typically support the rupee because India imports more than 80% of its oil needs. A decline in oil prices reduces the country’s import bill and eases pressure on inflation and the current account deficit.

Asian equities rose more than 1% on improving risk appetite, while the dollar index remained subdued near 98.99, further aiding emerging-market currencies.

However, traders cautioned that markets may remain volatile as uncertainty around Iran negotiations persists. Analysts at ING said investors may avoid overreacting to headlines given previous instances where talks between the US and Iran broke down after initial optimism.

Despite Monday’s recovery, concerns over imported inflation remain. State-run fuel retailers raised petrol and diesel prices for the fourth time in May as companies sought to offset higher crude-related costs triggered by the Iran conflict.

In the currency derivatives market, the one-month non-deliverable forward indicated the rupee at 95.75 per dollar, suggesting traders still expect some pressure on the currency.

Foreign investor flows also remained weak. NSDL data showed overseas investors sold a net $185.9 million worth of Indian equities and $35 million worth of bonds on May 21, reflecting continued caution toward Indian assets amid global uncertainty.