The Indian rupee opened 40 paise stronger at 85.05 per US dollar on May 26, extending gains made on the previous trading day, Friday, May 23. This appreciation is being driven by a combination of global and domestic tailwinds, including a softening US dollar, positive cues from Asian currency markets, and robust domestic equity performance.

The rupee briefly touched 84.98 in early trade, reflecting strong sentiment across Asia, especially after the Chinese yuan hit a seven-month high. These developments have brought a temporary relief to the rupee, which had been one of the underperformers among regional currencies.

Factors Driving the Rupee's Recovery

Several factors contributed to the rupee’s intraday rally:

• The US dollar index slipped by 0.34% to 98.67, reflecting mounting concerns over US fiscal sustainability and softer trade rhetoric.

• A broad Asian currency rally, led by the Chinese yuan strengthening to 7.1650 per dollar, helped lift the region’s currencies, including the Indian rupee.

• The Reserve Bank of India’s record ₹2.11 lakh crore dividend payout to the central government helped ease fiscal concerns and improved investor sentiment.

• Strong Foreign Institutional Investor (FII) inflows, with net equity purchases of ₹1,794 crore on May 23, added further strength to the currency.

Boost from Domestic Equities

The rupee’s performance also coincides with bullish domestic stock markets. At the opening bell, the BSE Sensex surged 631 points, while the Nifty climbed 187 points, reflecting investor optimism and global risk-on sentiment. A strong correlation between equities and the rupee often reinforces currency performance, and today’s movement is a clear example of that relationship.

RBI Dividend: A Fiscal Relief and Rupee Catalyst

One of the key supporting factors has been the RBI’s record-breaking dividend of ₹2.11 lakh crore for FY24 to the Union Government. This dividend:

• Eases fiscal deficit pressure

• Reduces the government’s borrowing needs

• Boosts overall macroeconomic sentiment

• Indirectly supports the rupee’s valuation

Economists believe that such a significant transfer helps lower the fiscal burden, which is seen as credit-positive for the country and currency-supportive in the medium term.

FIIs Return to Indian Markets

The return of FIIs is also a critical component of the rupee’s current recovery. After months of net selling, investors have resumed purchasing Indian equities, showing confidence in:

• India’s macroeconomic resilience

• Steady corporate earnings

• Political stability ahead of the general elections

• Higher GDP growth expectations compared to global peers

The ₹1,794 crore inflow on May 23 is seen as part of a broader trend of renewed interest in Indian assets, which enhances forex reserves and strengthens the rupee.

Asian Currency Sentiment Lifts INR

The broader rally in Asian currencies is another key factor. The Chinese yuan's strong move set the tone for others like the Korean won, Thai baht, and Indonesian rupiah, all of which outperformed the rupee over the past month. This region-wide uptrend is helping:

• Improve relative currency performance

• Increase foreign investment appetite

• Stabilize emerging market exchange rates

Outlook for the Indian Rupee

Despite the recent rally, analysts are adopting a cautiously optimistic stance. Currency traders expect the rupee to stay within the 84.90–85.30 range in the short term. Several factors will determine the next movement:

• Global cues including US economic data, Fed commentary, and China’s macro releases.

• Upcoming domestic data, such as April's Index of Industrial Production (IIP) and Q1 FY25 GDP, which could shape short-term sentiment.

• Continued FIIs behavior and geopolitical stability.

While the rupee has bounced back, it still lags behind other Asian currencies in month-to-date performance, keeping market participants on guard.

Why the Rupee Still Lags Behind Peers

Even though the rupee gained today, it remains one of the weaker Asian currencies in May. Here's how it compares:

• The Korean won has appreciated significantly due to strong export data.

• The Thai baht gained on a tourism rebound.

• The Indonesian rupiah strengthened on rising commodity prices.

In contrast, the rupee has faced pressures from high crude oil imports, election-linked uncertainty, and capital outflows earlier in the month.

Risks Ahead for the Rupee

There are still headwinds the rupee could face:

• Crude oil price volatility: Higher import costs strain the current account.

• Geopolitical tensions: Especially in the Middle East or Indo-Pacific, can weaken risk sentiment.

• US interest rate stance: If the Fed delays rate cuts, the dollar could rebound, putting the rupee under pressure.

Conclusion: Strength with Caution

The rupee's current rally represents a positive development, driven by favorable global cues, supportive domestic developments, and renewed investor optimism. However, sustainability will depend on macro data, global monetary policy, and continued FII flows.

The Upcoming IPOs in this week and coming weeks are 3B Films, N R Vandana Tex Industries, Scoda Tubes,Neptune Petrochemicals, Astonea Labs, Nikita Papers, Prostarm Info Systems, Victory Electric Vehicles International, Blue Water Logistics, Wagons Learning.

The Current active IPO are Aegis Vopak Terminals, Schloss Bangalore, Unified Data - Tech Solutions.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.