Rupee Strengthens on Global Optimism and Weak US Dollar

India’s rupee strengthened by 25 paise to settle at 85.51 against the US dollar on Tuesday, July 1, 2025, supported by broad-based weakness in the greenback, positive domestic equities, and subdued crude oil prices.

The day’s move reversed Monday’s decline, when the rupee had closed 26 paise lower at 85.76.

Intra-day Movement Shows Resilience

At the interbank foreign exchange market, the rupee opened at 85.66 and hit an intraday high of 85.34 before settling at 85.51 (provisional).

Forex traders highlighted improved risk appetite globally, which supported emerging market currencies including the rupee.

Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan, explained:

“We expect the rupee to gain on the decline in US dollar and rise in risk appetite in global markets. Gold is trading at its lowest levels since February 2022 and **10-year US bond yields briefly slipped below 4.2%.”

Global Factors Supporting Rupee

A key driver for the rupee’s strength was weakness in the US dollar.

The dollar index, which measures the greenback against a basket of six major currencies, fell 0.46% to 96.43.

Market participants noted that the dollar is trading at its lowest levels since February 2022, due in part to political uncertainty surrounding President Donald Trump’s influence on Federal Reserve policy, raising concerns about the Fed’s independence.

This perceived policy risk has led investors to reprice dollar expectations and move into riskier assets, supporting currencies like the rupee.

Oil Prices Offer Additional Support

Another supportive factor was stable crude oil prices.

Brent crude, the global oil benchmark, fell 0.24% to $66.58 per barrel in futures trade.

Lower oil prices are especially beneficial for India, which is one of the world’s largest crude importers.

Cheaper oil helps:

• Reduce India’s import bill

• Ease pressure on the current account deficit

• Cool domestic inflation

These effects strengthen macroeconomic fundamentals, making the rupee more attractive to investors.

Market Sentiment and Risk Appetite

The day’s rupee move also reflected improved global risk appetite.

Equities across the world saw positive momentum, with investors betting on:

• Continued moderate US monetary policy.

• Stabilising geopolitical risks.

• Resilient emerging market growth prospects.

In India, the domestic equity market posted modest gains:

• Sensex advanced 90.83 points (0.11%) to 83,697.29.

• Nifty rose 24.75 points (0.10%) to 25,541.80.

This positive tone in equities often feeds into forex markets, as foreign investors increase inflows, supporting the rupee.

Outlook for USD-INR

Despite the strong showing on Tuesday, analysts remained cautious about the rupee’s near-term trajectory.

Anuj Choudhary suggested:

“Recovery in crude oil prices may cap sharp gains. Traders may take cues from ISM manufacturing PMI, JOLTS job data from the US and Fed Chair Jerome Powell’s speech. USD-INR spot price is expected to trade in a range of 85.20 to 85.85.”

This outlook suggests continued volatility tied to:

• US economic data releases.

• Monetary policy commentary from the Federal Reserve.

• Movement in global crude oil markets.

Dollar Weakness: A Key Driver

The rupee’s appreciation is part of a broader trend of dollar weakness globally.

The US dollar has been under pressure due to:

• Market concerns over the Fed’s future independence and policy direction.

• Signs of softening inflation in the US.

• Lower bond yields, with the 10-year yield briefly falling below 4.2%.

As the dollar loses ground, emerging market currencies including the rupee tend to strengthen.

Commodities Market Trends

The commodities market offered further context:

• Gold prices have declined to lowest levels since February 2022, signalling reduced safe-haven demand as risk appetite improves.

• Crude oil remained subdued, which is beneficial for India’s external balances.

These trends support the rupee by:

• Reducing imported inflation.

• Improving trade deficit dynamics.

• Making India’s macro fundamentals more stable.

Domestic Macro Backdrop

On the domestic economic front, the rupee’s performance also came amid mixed macro data:

• India’s industrial production growth slowed to a nine-month low of 1.2% in May 2025.

• The slowdown was attributed to poor performance in manufacturing, mining, and power sectors, partly due to the early onset of the monsoon.

While this indicates softer domestic demand, the strong rupee helps by:

• Easing imported inflation pressures.

• Supporting the Reserve Bank of India’s monetary stance.

Fiscal Position Offers Stability

India’s fiscal position also added a note of confidence for forex markets.

The Central Government’s fiscal deficit fell to 0.8% of the full-year target at the end of May.

This improvement was mainly due to a ₹2.69 lakh crore dividend from the Reserve Bank of India (RBI), which:

• Boosted government revenues.

• Helped contain borrowing needs.

• Offered fiscal room for policy measures.

A stable fiscal outlook supports the rupee by reducing risk premiums attached to Indian assets.

Foreign Investor Activity

Data from exchanges showed that Foreign Institutional Investors (FIIs) sold ₹831.50 crore of equities on a net basis on Monday (June 30, 2025).

Despite this outflow, the rupee appreciated on Tuesday, suggesting that positive global cues and broad dollar weakness outweighed short-term equity market dynamics.

Global Events to Watch

Looking ahead, forex traders will monitor key international events:

• ISM manufacturing PMI and JOLTS job data in the US.

• Speeches by Federal Reserve Chair Jerome Powell, which may signal future policy directions.

• Crude oil market movements, given India’s import dependency.

These events could impact dollar demand, bond yields, and risk appetite, shaping USD-INR trading ranges.

Conclusion

The rupee’s 25 paise gain to 85.51 against the US dollar reflects a complex interplay of global and domestic factors:

• Dollar weakness driven by US political uncertainty and lower bond yields.

• Subdued crude oil prices, offering relief to India’s import bill.

• Improved risk appetite, supporting emerging market currencies.

• Positive domestic equity markets, signalling investor confidence.

Despite the day’s gains, analysts remain cautious about near-term volatility, with global data and policy signals likely to drive future moves.

India’s strong macro fundamentals, manageable fiscal position, and resilient external balances provide a solid base for the rupee, even as short-term pressures remain.

As markets navigate global economic shifts, the rupee’s path will depend on a careful balance of domestic policy management and international developments.

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