Indian rupee rose by 23 paise to reach 96.65 level to the US dollar in early trade as some respite came to the domestic currency amidst foreign exchange market volatility. The change occurs in the wake of the continuing watch by investors on the economic situation globally, crude oil prices and demand for US dollars.
There are various reasons for changes in the value of currencies. International business and investments, expectations of inflation and US dollar strength among others affect currency movements. The rise in the early part of the day shows a shift in market conditions but the sustainability of the rise depends on events during the day.
Crude oil prices play a role in influencing the Indian currency because India is a significant importer of energy needs. High crude oil prices may lead to higher import cost thus demanding foreign currencies. However, lower crude oil prices may reduce import cost.
Activity by foreign institutional investors constitutes yet another major consideration for the rupee. Higher investments from foreign players in the domestic equity and bond markets generate demand for the domestic currency. However, substantial pullback from domestic markets can increase the demand for dollars.
Events in the US, including interest rate expectation and movements in US Treasury rates, also have an impact on the currency market. The strength of the dollar against other major currencies impacts the emerging market currencies, while changes in risk sentiment can impact flows into India.
Currency traders would continue to focus on the rupee-dollar cross, the prices of crude oil, foreign exchange reserves, and the policy stance of the Reserve Bank of India, among others. All of them can be factors impacting the currency’s trend in the coming sessions.
While the initial performance of the rupee was positive, currency markets can still be impacted by global events. Participants in international trade will have to keep a tab on the movements in exchange rates.
An initial appreciation of the rupee offers a positive start to the domestic currency, but further action depends on various global triggers and demand-supply fundamentals in the foreign exchange market.
