The Indian rupee staged a modest recovery on Thursday, breaking its six-day losing streak amid improved global risk sentiment. The currency closed at 91.63 per dollar, recovering from Wednesday's record low of 91.7425, though it struggled to sustain gains above the key 91.50 level.

Trump's Tariff Retreat Boosts Market Sentiment

The rupee's recovery was primarily driven by relief in global markets after Trump announced at the World Economic Forum in Davos that the U.S. would not proceed with tariffs on Europe that were scheduled to take effect from February 1. This announcement eased fears of a broader U.S.-Europe trade dispute and provided support to emerging market currencies.

"Trump's latest remarks eased fears of a broader U.S.-Europe trade dispute, offering some relief to emerging market currencies, including the rupee," said Dipti Chitale, CEO at Mecklai Financial Services.

Currency Performance and Trading Patterns

Traders observed that the rupee's movement followed the typical pattern seen in recent days, where recoveries struggle to hold momentum. The currency opened higher against the dollar but gave up some gains after failing to break past the 91.50 resistance level.

Ongoing Challenges Weigh on Outlook

Despite the temporary relief, several factors continue to pressure the rupee. Chitale highlighted that delays in a U.S.-India trade agreement are hurting exports that face a steep 50% tariff, while steady dollar demand from importers weighs on market sentiment.

Foreign Investment Outflows Continue

Capital flows remain a significant concern for the rupee's performance. Foreign investors have withdrawn nearly ₹3 billion from Indian equities so far this month, following ₹18 billion of outflows in the previous year. Market participants expect dollar demand and capital flows to continue dominating currency movements in the near term.

Global Market Response

The positive sentiment extended beyond currency markets, with U.S. equities and Treasuries rallying following Trump's announcement. Asian currencies broadly benefited from the reduced trade tension fears, as markets ruled out an immediate escalation in U.S.-Europe trade disputes.

Indian equity markets are seeking decisive direction as global uncertainties persist while domestic fundamentals show gradual improvement. Rahul Singh from Tata Asset Management has identified currency stability as the primary catalyst that could unlock market potential, even as corporate earnings continue to deliver steady performance.

Earnings Season Delivers on Expectations

The current earnings season has provided reassurance to investors, with companies largely meeting or exceeding market expectations. Singh highlighted that core earnings drivers remain robust across multiple sectors.

"The earnings season has started by and large quite fine actually because the numbers are either in line or better than expectations. The core drivers of earnings, whether it is credit growth, consumption and the likely impact of GST on the outlooks which the companies are painting for next year, all those things are going as per plan. Even IT is kind of, in pockets, managing to surprise," Singh explained.

Key sectors showing resilience include traditional growth drivers like credit and consumption, while information technology has delivered selective positive surprises, indicating underlying business momentum remains intact.

Currency Volatility Emerges as Primary Concern

Despite positive earnings trends, Singh emphasized that rupee stability has become the most critical factor for market direction. The currency's recent weakness has created investor anxiety, particularly given its impact on foreign investment flows.

"The bigger issue is obviously on the macro and how the USD-INR is behaving. I think that is creating a little bit of nervousness because a large part of flows obviously tracks that and therefore tends to have a knee-jerk reaction to how the rupee is behaving. So, the first trigger for the market is not going to be the budget, not going to be earnings; it is going to be stability in the rupee," Singh stated.

The rupee's depreciation occurring alongside relatively stable crude oil prices presents an unusual combination that requires careful monitoring, as this dynamic typically suggests other underlying pressures on the currency.

Valuation Metrics Show Improvement

Market valuations have undergone significant normalization over recent months, creating more attractive entry points for investors. The correction has been broad-based, affecting both sectoral themes and individual stocks.

"Nifty PE itself has come down from 22.5–23 times forward in the middle of 2024 to now close to 20 times, and earnings are likely to go up. So, all those things are falling in place and now the macro has to fall in place," Singh noted.

The valuation correction has been particularly pronounced in previously overheated sectors. Defense, manufacturing, and capital goods segments have experienced significant corrections from their peaks, making individual stocks within these themes more reasonably priced.

Sector-Specific Investment Approach

Singh's investment strategy reflects a selective approach across different market segments and sectors. His outlook varies significantly based on investment timeframes and specific sectoral dynamics.

For market capitalization preferences, the assessment depends heavily on investment horizon:

• Five-year outlook: Favors mid and small-cap stocks
• Two-year horizon: Neutral positioning
• One-year timeframe: Large-cap preference due to current underweight positioning

In information technology, the approach has evolved from broad sector underweights to stock-specific opportunities, recognizing uneven growth patterns within the sector. Real estate presents emerging opportunities following sharp derating, with some companies trading below net asset value of ongoing and pipeline projects.

Commodity Cycle and Market Outlook

Regarding industrial commodities, Singh believes the current cycle remains in its middle phase, supported by policy measures in China. This assessment suggests continued opportunities in commodity-related investments, though the early-stage explosive growth phase has passed.

The market appears positioned in a wait-and-watch mode, where steady earnings provide fundamental support, but meaningful upward movement awaits macro stability restoration, particularly regarding currency movements. Until rupee volatility subsides, discussions around valuations and earnings growth may not translate into sustained market momentum.