The rupee opened firm at 96.19 on Thursday and is trading closer to this week’s highs near the 96/$ mark. This is after the RBI’s overnight announcement to inject liquidity into the banking system. The pullback in oil prices also added to the currency’s strength.
However, analysts maintained a cautious stance. Devarsh Vakil, Head of Prime Research at HDFC Securities outlined that the “sharp rupee weakness likely reflects persistent FII outflows, elevated crude prices, and safe-haven demand for the dollar amid global risk-off sentiment.”
Here is a look at the three factors why the rupee is trading relatively stronger at this hour –
RBI’s 3-year swap arrangement: Why it matters
The Reserve Bank of India scheduled the $5 billion dollar/rupee buy-sell swap auction with a tenor of three years for May 26. Under the three-year swap arrangement, banks will sell US dollars to the RBI and simultaneously agree to buy them back at the end of the tenure, helping the central bank infuse durable rupee liquidity into the system.
Crude pullback adds strength to rupee
Brent crude dropped 5.6% on Wednesday and is currently hovering near the $105 a barrel level. Investors continued to monitor headlines for signs of progress in U.S. negotiations with Iran to resolve the conflict. U.S. President Donald Trump said on Wednesday that negotiations were in the final stages while warning of further attacks unless a deal is made. The selloff in U.S. Treasuries on concerns that a higher inflation outlook could lead to a Federal Reserve rate hike, halted, following the drop in oil prices.
US 10-year yield falls
The US 10-year yield fell nearly 10 basis points to slip below the 4.60% level. However, analysts cautioned that yields could rise further, adding pressure on the rupee and other emerging market currencies, with rates in Europe, the UK and Japan tracking the US move. Reuters quoted ING analysts who stated that, “Hard to shake off the bearish dynamic without a solution in the Middle East,” ING Bank said in a note.