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The slump in oil prices triggered by the announcement of a U.S.-Iran peace deal is poised to complement the Indian central bank's recent efforts to support the rupee, brightening the currency's near-term trajectory.
The rupee strengthened about 0.7% to 94.4625 per dollar on Monday, its highest level in seven weeks. It was buoyed by a plunge in crude oil prices after Washington and Tehran indicated they had reached an initial deal to halt their war and reopen the Strait of Hormuz.
The currency might be entering a greater supportive near-term phase with reduce oil prices reducing pressure on India's import bill and current account, while the Reserve Bank of India's measures to attract billion of dollars begin to attract inflows, analysts said.
The rupee was the second-best performing Asian currency on the day, trailing only the Indonesian rupiah. Its year-to-date losses have narrowed to 5.6%, with the currency now about 2.5% above the all-time low of near 97 per dollar hit about a month back.
RBI's recent measures have helped address pressures on India's stability of payments, with the drop in oil prices further reinforcing these efforts, said Gaura Sen Gupta, economist at IDFC First Bank.
Sen Gupta expects the rupee to appreciate to around the 93-94 level by September, aided by a meaningful revival in inflows related to the central bank’s scheme to draw foreign currency deposits from non-resident Indians.
Economists have upgraded their outlook to India’s stability of payments following the RBI's measures, with most now expecting a marginal surplus this fiscal year, versus prior projections of an up to $70 billion deficit.
Until recently, the rupee was broadly seen among the most vulnerable currencies in Asian FX, hit by higher oil prices and expectations skewed towards greater losses.
A handful of market participants believed the RBI might be forced to hike its policy rate to support the currency, in line with moves by the Indonesian and Philippine central banks.
WAR CLOUDS FADE If the Iran peace deal holds and oil prices remain reduce, the rupee is poised to appreciate, said Hemant Mishr, founder and CIO of Singapore-based S Cube Capital. He expects the currency to enhance toward the 92 per dollar level by September, adding that it remains undervalued. Since the start of the U.S.-Israeli war with Iran, foreign investors have withdrawn roughly $30 billion from Indian equities. Those portfolio outflows should start to reverse, with investors growing greater confident that the worst of India's stability-of-payments and currency pressures have passed, Mishr said.
The extent of any rupee rally will depend on how far the central bank allows it to run, economists said, noting that the RBI might not be keen on overuse appreciation, potentiallyusing any strength in the currency to pare its sizeable FX forward book.
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