On Friday, the Indian rupee experienced its sharpest single-day appreciation since November 2022, boosted by expected foreign inflows, a weaker US dollar, and lower crude oil prices.

Key Highlights

• Rupee posts strongest single-day gain since November 2022, closing at 85.22 against the dollar.
• Currency surge driven by foreign bank dollar sales and unwinding of bearish positions amid dollar weakness.

The domestic currency closed 78 paise higher, at 85.22 against the US dollar, after closing at 86.00 on Thursday. According to Bloomberg, it briefly fell to 86.04 before rising 1.03 percent.

Earlier this week, the currency surpassed the 86 mark for the first time in over a month. This month, the rupee has depreciated by 0.85%.

The rupee is getting close to a fair valuation, according to Amit Pabari, managing director of CR Forex Advisors, as the Real Effective Exchange Rate (REER) dropped to 100.8, down 0.7 points from 101.5 the previous month and significantly from a recent high of 108.14. "This correction is expected to increase the export competitiveness of Indian goods, supporting the currency in the face of global uncertainty.

A surplus of ₹2.2 trillion to ₹3.1 trillion is expected to be distributed as a dividend to the government by the Reserve Bank of India for the fiscal year 2024–2025.

The US House passed a massive tax bill Thursday that will raise the nation's debt by $3.8 trillion over the next ten years, adding to fiscal concerns.

According to Pabari, the Dollar Index is displaying signs of exhaustion despite recent gains as growing US fiscal concerns affect sentiment. The dollar index dropped 0.6% to 99.36, comparing the US dollar to a basket of six major currencies.

Foreign institutional investors (FIIs) might keep selling as the yield difference between US and Indian 10-year bonds gets smaller, Pabari said. India is less desirable for carry trades due to this narrowing spread, which was last observed in July 2004 and exacerbates rupee weakness.