CHENNAI: As of the week ending May 30, the Indian rupee (INR) experienced a modest appreciation against the US dollar (USD), closing at ₹85.35, up 0.2% from the previous day's close of ₹85.50. This uptick was influenced by a decline in the US dollar index, which fell due to renewed uncertainties surrounding US trade tariffs and disappointing US economic data, including weaker labor and consumption figures.
Despite this short-term gain, the rupee faced challenges over the month of May, declining by approximately 1% and underperforming compared to other Asian currencies. Factors contributing to this decline included geopolitical tensions, particularly between India and Pakistan, corporate demand for dollars, and the Reserve Bank of India's (RBI) interventions aimed at rebuilding foreign exchange reserves.
Looking ahead, analysts suggest that the rupee may continue to face pressure due to ongoing global uncertainties and domestic economic factors. The RBI's focus on foreign exchange reserves and potential monetary policy adjustments will be key factors to monitor in the coming weeks.
Key Drivers
US Dollar Weakness: A fall in the US Dollar Index, prompted by weak labor market data and lower consumer spending in the US, provided a temporary boost to the rupee.
Global Trade Concerns: Renewed tensions around U.S. tariffs affected global market sentiment, indirectly supporting the rupee by weakening the dollar.
Crude Oil Volatility: Fluctuations in global crude oil prices continued to weigh on investor sentiment, with upward movement posing risks for India’s import bill and inflation outlook.
Monthly Context
Despite the weekly improvement, the rupee ended May with a 1% monthly depreciation, making it the worst-performing Asian currency for the month. Several domestic and geopolitical factors contributed to this underperformance:
India-Pakistan Border Tensions: Heightened geopolitical risk dampened investor confidence.
Corporate Dollar Demand: Increased month-end dollar demand from Indian corporations added pressure on the rupee.
RBI Intervention: The Reserve Bank of India remained active in the forex market, reportedly buying dollars to rebuild foreign exchange reserves, further contributing to the rupee’s weakness.
Outlook
The short-term trajectory of the rupee remains uncertain and cautious:
The RBI’s policy direction, particularly regarding inflation control and reserve accumulation, will be closely watched.
Global risk sentiment, driven by geopolitical developments and macroeconomic signals from the US and China, could affect capital flows.
Analysts warn of continued volatility, with the rupee expected to face downward pressure unless there is a clear reversal in dollar strength or easing of regional tensions.
Conclusion
While the Indian rupee closed the final week of May on a slightly stronger note, underlying concerns persist. Market participants will closely monitor RBI actions and global developments, with particular attention on inflation data, monsoon forecasts, and geopolitical headlines.