The Indian rupee strengthened against the US dollar on Thursday, November 5, opening at 94.35 per dollar against Wednesday’s close of 94.64. It subsequently strengthened further to touch a 15-day high of 94.33 per dollar, supported by falling crude oil prices and FPI inflows
The fall in crude prices followed the US midterm election results, which saw President Donald Trump’s Republican Party lose control of Congress.
Markets are assessing whether the political setback could push the US administration towards a negotiated exit from the Iran conflict.
Brent crude fell around 8.5% to $94.20 per barrel in Asian trade. Prices are down nearly 20% this week.
Why have crude oil prices fallen?
Oil prices had remained elevated amid more than eight months of conflict involving Iran, repeated military escalations, concerns over disruptions to oil supplies and uncertainty surrounding the Strait of Hormuz, a key route for global oil shipments.
With negotiations repeatedly failing to produce a breakthrough, markets had factored in the possibility of prolonged supply disruptions and a higher geopolitical risk premium in crude prices.
The latest decline suggests investors are assessing the possibility that the Republican Party’s election setback could increase pressure on Trump to reconsider his approach to the conflict and pursue a negotiated resolution.
Analysts at ING Bank said the Democratic Party’s decisive victory could make it more confident in pushing back against Trump’s policies on Iran, support for Israel and any escalation of tariffs.
MUFG Bank described the election outcome as a meaningful shift in the US political landscape that could trigger an unwinding of some of the political and geopolitical risk premium embedded in markets.
How does lower crude oil benefit the rupee?
India imports a significant part of its crude oil requirements. Since oil purchases are largely settled in US dollars, higher crude prices increase the country’s dollar requirements and can put pressure on the rupee.
When crude prices decline, India’s oil import bill and demand for dollars can ease. This can reduce pressure on the domestic currency.
A sustained fall in oil prices can also influence India’s growth and inflation outlook, potentially making Indian financial assets more attractive to foreign investors.
What role are FPI inflows playing?
FPI inflows have also supported the rupee’s movement. Foreign investors bringing money into Indian equity and debt markets need to convert foreign currency into rupees, adding to demand for the domestic currency.
The combination of lower crude prices and FPI inflows has supported the rupee’s recovery.
However, the sustainability of the currency’s recovery remains linked to the movement of crude oil prices. A currency trader at a bank said concerns over oil had continued to cloud the rupee’s outlook, adding that a meaningful and sustained correction in crude could change the equation.
Why has India’s 10-year bond yield declined?
India’s benchmark bond yield fell to a 40-day low of 7.1% as crude oil prices and US yields declined.
Lower crude prices can ease concerns around imported inflation, while a fall in US Treasury yields can influence the movement of global investment flows and demand for Indian bonds.
Bond yields and prices move in opposite directions. When bond prices rise, yields fall, and vice versa.
What should markets watch?
The sustainability of the fall in crude oil prices will be important for the rupee’s outlook. Developments in the Iran conflict, the possibility of a negotiated resolution and any disruption to oil supplies will remain key factors for global crude prices.
For the domestic currency, crude oil prices and FPI flows will continue to be important factors to watch.
-With Reuters inputs