The Indian rupee demonstrated resilience in early Monday trading, gaining 12 paise to reach 90.66 against the US dollar after recovering from significant losses in the previous session. The currency opened at 90.68 at the interbank foreign exchange before strengthening further, marking a notable turnaround from Friday's performance when it crashed 44 paise to settle near its lowest level at 90.78.

Currency Performance Analysis

The rupee's recovery came amid a broader weakening of the US dollar against major international currencies. Market data shows the currency's recent volatility, with Friday's decline following a 17-paise loss in the two preceding sessions.

Market Dynamics and Support Factors

Forex analysts attributed the rupee's strength to the retreating greenback against major overseas rivals. The dollar index, which measures the greenback's performance against a basket of six currencies, traded 0.21% lower at 98.99, providing crucial support for emerging market currencies including the rupee.

The domestic currency found additional support following a sell-off in the dollar after US President Trump announced plans to impose tariffs on European countries if they resist his plan to buy Greenland. This geopolitical development contributed to dollar weakness across global markets.

Challenges and Market Headwinds

Despite the positive opening, several factors continued to create uncertainty for the rupee's trajectory:

• Foreign Fund Outflows: Persistent selling by foreign institutional investors from domestic equity markets
• Crude Oil Prices: Higher overseas crude prices amid volatile geopolitical conditions
• Market Sentiment: Cautious investor approach due to multiple risk factors

Domestic Equity Market Impact

The currency movements occurred alongside weakness in domestic equity markets. The Sensex declined 482.80 points or 0.58% to 83,087.55, while the Nifty fell 129.30 points or 0.50% to 25,565.05. Foreign institutional investors continued their selling spree, offloading equities worth ₹4,346.13 crore on Friday according to exchange data.

Brent crude, the global oil benchmark, traded 0.17% higher at USD 64.24 per barrel in futures trade, adding to concerns about India's import bill and current account dynamics. The combination of higher crude prices and foreign fund outflows has created a challenging environment for the rupee despite Monday's early gains.

The Indian rupee posted its worst single-day performance in nearly two months on Friday, declining 0.6% to close at 90.8650 per dollar. The sharp fall brought the currency dangerously close to its all-time low of 91.0750 recorded in December, highlighting mounting pressure on the South Asian currency.

Key Market Movements

The rupee's decline was driven by multiple factors, with elevated dollar demand from importers and maturing positions in the non-deliverable forwards market creating significant downward pressure. The currency also weakened 0.7% on a weekly basis, reflecting sustained selling pressure.

Central Bank Intervention

State-run banks conducted intermittent dollar sales throughout the trading session, most likely acting on behalf of the Reserve Bank of India. These interventions helped limit the currency's fall and prevented a more severe decline. Traders noted that while RBI's support measures provide near-term stability, they also drain rupee liquidity from the banking system, creating upward pressure on local borrowing costs.

Trade Data and Economic Backdrop

India's merchandise trade deficit for December reached $25.04 billion, according to data released on Thursday. Despite this deficit, the data showed resilience in exports to the United States, even in the face of steep tariffs. The local currency's weakness also pushed dollar-rupee forward premiums to three-week highs as importers rushed to lock in hedges while interbank traders maintained a paying bias.

Market Outlook and Analysis

Analysts at ANZ noted that depreciation pressure on the rupee is likely to persist, particularly in the absence of an India-US trade deal. They suggested that the optimal policy approach would be to tolerate a more flexible exchange rate, allowing liquidity to be boosted to levels sufficient to support domestic demand.

Global Context

Asian currencies remained largely rangebound during the session, while the dollar index hovered near a six-week high following upbeat US economic data. Markets have significantly reduced expectations for Federal Reserve rate cuts, with a 67% probability now assigned to the Fed maintaining rates in April, up from 37% a month ago. The odds of rate cuts in January and March stand at approximately 5% and 20%, respectively, according to the CME FedWatch tool.