The Indian rupee staged a recovery on Monday, closing 2 paise higher at 90.16 against the US dollar after bouncing back from earlier weakness. The domestic currency benefited from a combination of factors including a weakening American dollar, declining crude oil prices, and improved market sentiment following positive developments on the India-US trade front.

Trading Session Performance

The rupee's trading session showed significant volatility before settling at stronger levels. Key trading metrics for the session included:

This recovery came after the rupee had depreciated by 28 paise on Friday to close at 90.18 against the greenback, making Monday's gains a notable turnaround.

Market Drivers and External Factors

Several key factors contributed to the rupee's strengthening during the session. The dollar index, which measures the greenback's strength against six major currencies, declined 0.34% to trade at 98.55, providing relief to emerging market currencies including the rupee. Additionally, Brent crude oil, the global benchmark, fell 0.28% to USD 63.16 per barrel in futures trade, reducing India's import burden concerns.

Market sentiment received a significant boost from comments by US envoy to India Sergio Gor, who indicated that delegates from both nations are actively working to finalize a trade deal. This development helped offset some of the risk aversion that had initially weighed on the currency.

Analyst Outlook and Trading Range

According to Anuj Choudhary, Research Analyst at Mirae Asset ShareKhan, the rupee opened weak due to risk aversion in global markets and rising geopolitical tensions but recovered on the bounce back in domestic markets following the positive trade deal comments. He noted that traders are now focusing on upcoming inflation data from both the US and India.

Choudhary projected that the USD-INR spot price is expected to trade in a range of ₹89.90 to ₹90.60, suggesting continued volatility around current levels.

Domestic Market Performance and Capital Flows

The domestic equity markets provided additional support to rupee sentiment, with both major indices posting gains:

However, foreign institutional investors continued their selling streak, offloading equities worth ₹3,769.31 crore on Friday according to exchange data, which could limit sustained rupee strength.

Forex Reserves Update

The Reserve Bank of India's latest weekly data showed India's forex reserves dropped by $9.809 billion to $686.801 billion in the week ending January 2. This decline followed a $3.293 billion increase in the previous week when reserves had reached $696.61 billion. The reduction in reserves reflects the central bank's intervention to manage currency volatility amid global uncertainties.

Despite Monday's recovery, analysts noted that volatile geopolitical conditions continue to keep the domestic currency under pressure, restricting the extent of its gains. Market participants are now awaiting key macroeconomic data releases from both India and the US this week for further direction.

The Indian rupee concluded Monday's trading session with minimal movement, closing at 90.1525 per dollar compared to the previous session's 90.1625. The currency found itself navigating between opposing market forces that largely neutralized each other's impact.

Dollar Weakness Fails to Boost Rupee

The US dollar experienced broad-based weakness, declining 0.40% to 98.80 against a basket of major currencies. This weakness stemmed from renewed market concerns regarding the independence of the US Federal Reserve. However, the rupee was unable to capitalize on this dollar softness due to persistent corporate hedging demand from domestic firms.

Analysts at ING highlighted the significance of Federal Reserve independence concerns, noting that "the downside risks for the dollar from any indications of further determination to interfere with the Fed's independence are substantial." They emphasized that the bond market would serve as the most important barometer for future dollar movements.

Trade Talk Optimism Supports Market Sentiment

Indian equity markets reversed early losses to close higher by approximately 0.40% each, with both the BSE Sensex and Nifty 50 benefiting from easing trade concerns. The positive shift came after Washington's new ambassador to New Delhi announced that the two countries would discuss trade issues on January 13.

Additionally, India received an invitation to join Pax Silica, a US-led initiative focused on building a comprehensive silicon supply chain spanning from critical minerals to semiconductors and artificial intelligence technologies. This development provided further support to market sentiment and helped offset some of the persistent concerns surrounding US-India trade relations.

Commodity Markets and Global Risk Sentiment

Global risk sentiment was influenced by broader geopolitical concerns, with gold reaching a record high of more than $4,600 per ounce. The precious metal's surge was attributed to investor concerns over simmering geopolitical tensions around Iran, reflecting the ongoing risk-off sentiment in global markets.

Foreign Investment Outflows Continue

Despite the positive trade talk developments, foreign portfolio investment flows remained a concern for the rupee. Foreign investors have net sold over $1 billion of Indian stocks in January alone, adding to the substantial $19 billion outflow recorded in the previous year. The failure to reach a comprehensive trade deal with the US has been identified as a persistent drag on both the rupee's performance and foreign portfolio inflows into Indian assets.

The currency's performance reflects the complex interplay between global dollar dynamics, domestic corporate demand, and ongoing concerns about trade relationships and foreign investment flows. While the scheduled trade discussions offer hope for improved bilateral relations, the rupee continues to face headwinds from sustained foreign portfolio outflows.