The Indian rupee opened stronger against the US dollar on Tuesday, gaining ground on the back of encouraging domestic economic data and a softer American currency in global markets. However, the appreciation was kept in check by persistent foreign fund outflows and a weak opening in the domestic stock indices.
Rupee's Movement and Key Levels
In early trade at the interbank foreign exchange market, the local currency opened at 89.98 and then strengthened to 89.95 against the US dollar. This marked a gain of 3 paise from its previous close of 89.98 on Monday. The rupee had closed 8 paise lower in the previous session.
Forex traders highlighted that the Reserve Bank of India (RBI) was active in managing volatility. "The RBI on Monday protected the top end of the curve while FPIs who sold equities also were dollar buyers, keeping bids on for the full day and taking it almost to 90 levels," explained Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors LLP.
Drivers Behind the Rupee's Strength
A primary factor supporting the rupee was the unexpectedly strong Index of Industrial Production (IIP) data released on Monday. The industrial output growth for November surged to a 25-month high of 6.7%, dramatically surpassing market expectations of 2.5% and the previous month's growth of 0.5%.
"The growth during the year has been 3.30 per cent against 2.70 per cent in the last month," Bhansali added, underscoring the positive momentum in the industrial sector. Concurrently, the dollar index, which measures the US currency's strength against a basket of six peers, was trading marginally lower by 0.03% at 98.01, providing additional tailwind for emerging market currencies like the rupee.
Factors Limiting the Gains
Despite the positive cues, the rupee's rise was constrained by several headwinds. Foreign Institutional Investors (FIIs) continued to be net sellers in the Indian equity markets. Exchange data showed they offloaded equities worth Rs 2,759.89 crore on Monday, creating demand for dollars.
Furthermore, domestic equity benchmarks Sensex and Nifty50 opened in the red, reflecting weak global cues. The BSE Sensex was down over 120 points, while the Nifty50 slipped below the 25,950 mark. This risk-off sentiment in equities typically pressures the local currency. Marginally higher crude oil prices also acted as a dampener, given India's significant import bill for petroleum products.
In summary, while robust economic data provided a foundation for strength, the combined effect of foreign capital flight and subdued market sentiment prevented a sharper appreciation of the Indian rupee during the session.
