The Indian rupee snapped its four-day losing streak on Tuesday, appreciating 12 paise to settle at 90.18 against the US dollar. The recovery came as the US dollar index declined following disappointing American economic data, though domestic factors continued to weigh on the currency's performance.

Currency Performance Overview

At the interbank foreign exchange market, the rupee opened at 90.22 against the US dollar and traded within a range of 90.08-90.25 before closing at the day's provisional rate. This represented a significant improvement from Monday's close of 90.30, marking a 12 paise gain for the domestic unit.

Market Factors and Analysis

Forex traders attributed the rupee's recovery to a weaker US dollar index, which declined 0.06% to 98.21 following below-expectation US ISM Manufacturing PMI data. However, several factors prevented sharper gains for the domestic currency, including weak domestic equity markets and ongoing geopolitical tensions between the US and Venezuela.

Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan, expects the rupee to trade with a negative bias due to risk aversion in global markets stemming from US-Venezuela geopolitical tensions. He noted that surging crude oil prices and foreign institutional investor outflows may further pressure the currency, though a weak dollar and potential RBI intervention could provide support at lower levels.

Domestic Market Performance

Domestic equity markets faced significant pressure during the trading session. The benchmark indices recorded notable declines, with foreign institutional investors continuing their selling spree.

Economic Indicators

India's services sector showed signs of moderation in December, with growth rates easing to an 11-month low. The seasonally adjusted HSBC India Services PMI Business Activity Index fell from 59.8 in November to 58.0 in December, indicating the slowest expansion rate since January 2025. Companies also refrained from recruiting additional staff as incoming new work and output expansion rates slowed.

Brent crude, the global oil benchmark, traded 0.47% higher at $62.05 per barrel in futures trade, adding to inflationary pressures that could impact the rupee's future performance. The combination of higher oil prices and continued foreign investor outflows presents ongoing challenges for the domestic currency despite Tuesday's recovery.

The Indian rupee ended marginally higher on Tuesday, breaking its four-day losing streak as state-run banks and foreign lenders sold dollars. However, importers used the move to step up hedging activities, which capped the currency's gains according to market participants.

Trading Performance and Key Levels

The rupee's trading session showed modest but notable improvement across key metrics:

The local currency was supported by dollar offers from state-run banks and a change in the way the daily fixing was quoted. The fixing, which reflects the premium or discount bankers are willing to pay to buy or sell dollars at the Reserve Bank of India's reference rate, was quoted at a discount on the day, compared with a premium during most recent sessions.

Market Dynamics and Analysis

A discount in the fixing typically signals heavier interest in selling dollars at the RBI reference rate. Dilip Parmar, forex research analyst at HDFC Securities, characterized the rupee's recent recovery as largely a tactical bounce driven by foreign bank dollar supply and a tentative return of foreign inflows.

However, Parmar noted that the currency remains fragile as the structural mismatch between dollar demand from importers and limited supply persists. The trend remains neutral-to-bullish for the spot rate as long as it remains above 89.90.

Trading Constraints and Market Sentiment

Dollar demand from importers at any dip limited the rise in the local currency, despite dollar sales from state-run and foreign banks, according to traders. This dynamic highlighted the ongoing challenge of importer hedging activities constraining rupee appreciation.

Asian cues were mixed for the rupee, with the dollar index extending the pullback from Monday, while Asian currencies were rangebound. The focus this week is on a raft of U.S. economic data, particularly the U.S. jobs report due on Friday, for clues on how many times the Federal Reserve is likely to cut interest rates in 2026.

Outlook and Key Factors

The rupee's performance reflects the complex interplay between institutional dollar supply and persistent import demand. While state-run and foreign banks provided dollar liquidity that supported the currency, the structural challenges in the forex market continue to limit significant appreciation. Market participants remain focused on upcoming U.S. economic indicators that could influence Federal Reserve policy decisions and broader currency market dynamics.