Rupee opens stronger as dollar index tumbles; rise in crude keeps traders on edge

The partially convertible rupee opened at 73.7560 per US

as against 73.9100/$1 at previous close. So far in the day, the domestic unit moved in a band of 73.7600-74.0600/$1.

The dollar index, which measures the US currency against six major rival currencies, was last at 94.97 as against 95.99 at the beginning of the current week.

The index weakened despite data showing that inflation in the US remained around a 40-year high, as investors did not see the fresh data altering the Federal Reserve’s current stance towards normalization of policy.

Earlier this week, Fed Chair Jerome Powell said while the US central bank would work to ensure that inflation did not get entrenched in the world’s largest economy; it would take considerable time to shrink the Fed’s $9 trillion balance sheet.

This suggests that global markets would still be the recipient of liquidity from the world’s largest economy. Given record-low interest rates in advanced economies, some portion of this liquidity would likely still find its way into higher-yielding assets in riskier emerging market economies such as India, dealers said.

The recent run of strength displayed by the rupee nonetheless, currency traders expressed worry about the trajectory of crude oil prices, pointing to already elevated trade deficits in India.

Global crude oil prices settled near a two-month high on Wednesday as investors were of the view that international demand would strengthen in 2022, the risks from the Omicron strain of the coronavirus notwithstanding.

Crude oil for February delivery on the New York Mercantile Exchange added $1.42 to close at $82.64 per barrel on Wednesday. Brent crude, the global benchmark, tacked on $0.95 to settle at $84.67 per barrel.

Elevated crude oil prices worsen the outlook for India’s inflation and current account as the country is the world’s third largest importer and consumer of the commodity.

Back home, data released after trading hours on Wednesday showed that Consumer Price Index based inflation rose to a five-month high of 5.59 per cent in December, well above the RBI’s medium-term target of 4 per cent for the price gauge.

With advanced economies showing signs of tightening interest rates, currency traders feared that overseas investors could pull out funds from Indian markets if the RBI were not to formally commence the process of policy normalization soon.