On May 27, the Indian rupee weakened by approximately 30 paise during afternoon trade, settling near 85.40 against the US dollar. Experts attribute this decline to a combination of a strengthening dollar index globally and a broad sell-off in Indian equity markets, which together increased demand for the US dollar, pushing the local currency down.

At 2:15 PM IST, the rupee was quoted at 85.4012 per US dollar, compared to its previous close of 85.0912. The currency had opened at 85.1438, indicating a steady depreciation throughout the trading session.

Strong Dollar Index and Domestic Market Sell-Off

Amit Pabari, Managing Director at CR Forex Advisors, explained the rupee’s slide by highlighting the impact of the Dollar Index (DXY). The DXY measures the greenback’s strength against a basket of six major global currencies. On the same day, the dollar index climbed from 98.934 to 99.359, signaling a strengthening dollar worldwide.

This dollar strength, coupled with significant selling pressure in Indian equity markets, notably in IT and financial stocks, led investors to seek refuge in the US dollar, resulting in increased demand and thereby weakening the rupee.

Sharp Decline in Benchmark Equity Indices

The Indian equity markets experienced a sharp fall on May 27, breaking a two-day rally. The Sensex dropped by 888.62 points (1.08%) to 81,287.13, while the Nifty fell 272.65 points (1.11%) to 24,718.00 by mid-afternoon. Weak cues from Asian markets and heavy selling in IT and financial sectors triggered this broad-based market sell-off.

This equity market weakness generally increases demand for the dollar as investors move money out of riskier assets like stocks into safer assets like the US dollar. This shift is one of the primary reasons behind the rupee’s depreciation.

Additional Demand from Oil Marketing Companies

A dealer from a brokerage firm also pointed out that short covering in the dollar market and demand from oil marketing companies for dollars added further pressure on the rupee. Oil marketing companies typically purchase dollars to pay for crude oil imports, and their buying activity raises demand for foreign currency.

Interestingly, on May 26, the rupee had briefly crossed the 84 level against the dollar during afternoon trade but gave up those gains due to dollar purchases by state-owned banks on behalf of oil companies.

Impact and Outlook

The combined effects of a stronger dollar, weak equity markets, and dollar demand from oil companies continue to weigh on the Indian rupee. Market participants will closely watch global currency movements and domestic equity trends to gauge the rupee’s direction in the near term.

In summary:

• The Indian rupee slipped by around 30 paise on May 27 due to a stronger global dollar and a domestic equity market sell-off.

• Sensex and Nifty indices fell over 1%, triggering demand for safer assets like the US dollar.

• Dollar index rose amid short covering and oil marketing companies’ dollar demand, adding to rupee depreciation pressures.

This scenario underscores the intricate link between equity market performance, global currency trends, and the Indian rupee’s valuation against the US dollar.

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