Rupee Strengthens to Under 85 Against Dollar on Robust Equity Inflows

On Monday, the Indian rupee staged a swift rally, momentarily appreciating to 84.96 against the US dollar before settling at 85.03. This was the rupee's best trading day since December 20, 2024, and a marked improvement from a close of 85.49 last Friday. Dealers attributed the gains to very strong buying in domestic equities and active dollar-selling by foreign banks. In fact, the rupee's 0.49% intraday rise was the largest single-day gain since April 11, clearly reflecting a market that has taken a strong shine to the currency.

At the start of this month, the rupee had also dipped beneath the 85 threshold on April 4, reaching as low as 84.95. However, meagre customer demand and a stronger dollar due to rising U.S. Treasury yields, along with expectations of a more aggressive Federal Reserve, kept the rupee under pressure. On Monday,  the Indian currency had gained some demand along with a slight boost coming from a more stable dollar. By the end of trading, the rupee had managed to push up a little, offering some direction. 

Equity Markets and Foreign Inflows Boost Sentiment

The resurgence of the rupee was fueled by a jump in the domestic equity market, where heavyweight stocks like Reliance Industries vaulted over 5 percent after they too beat quarterly earnings estimates. Reliance's stellar performance helped lift the broader market sentiment, in turn attracting foreign portfolio investment back into Indian equities.

A declining dollar worldwide also added to the rupee's momentum. The dollar index, which measures the greenback against six major currencies, dipped to 99.6. Meanwhile, other major global currencies, including the euro, pound sterling, and a number of Asian currencies like the Thai baht and the Malaysian ringgit, gained some ground against the dollar in April and early May, which further boosted the rupee's trajectory.

While Treasury officials observed a psychological resistance level around 85, they said that a convincing breach at that level could open a path for further appreciation. Most heads of Treasury believe that if the momentum continued, there was a chance that it could open below 85 in the next session and reach an additional movement of anywhere from 60 to 70 paise beyond that.

Bond Yields Rise Amid Foreign Selling

Though the rupee saw gains, the government bond market felt some pressure. The yield on the 10-year benchmark bond rose 4 basis points, to 6.40 percent, up from 6.36 percent at the previous close. 

Dealers linked the sell-off to profit-taking by foreign banks that had purchased the bonds. And they cited as reasons for the seemingly contrary movement the uptick in India-Pakistan tensions and the need for some participants to take profits after a recent run in both the rupee and the bond market. 

Accordingly, the authorities aim to offer a fresh 10-year bond, with INR 30,000 crore of securities available in the first auction on Friday. The new bond is likely to see strong demand, given the risk-off sentiment in the markets and the surging demand for fixed-income assets. The positive outlook for bonds is brightened further by the Reserve Bank of India's announcement that it would buy government securities in open market operations worth INR 1.25 trillion.