Rupee’s recovery faces test

The Indian rupee has experienced a slight recovery, appreciating by about 0.5 per cent or 48 paise against the dollar, closing at 95.38 on Tuesday. This gain can be attributed to positive foreign inflows, a weaker dollar, and lower crude oil prices. The Reserve Bank of India (RBI) has also provided support through incentives for overseas dollar deposits and easier access to government securities for foreign investors.

The RBI's monetary policy decision on Wednesday is expected to closely watched, though a rate hike is not anticipated.

NSDL data shows that net Foreign Portfolio Investment (FPI) inflows for the past week amount to approximately $704 million, with cumulative inflows for August reaching around $321 million. The external environment has also improved, with the dollar index declining around 1.6 per cent last week and Brent crude futures falling nearly 20 per cent from their recent high of $102 on July 23. Nevertheless, geopolitical tensions in West Asia remain uncertain, with Iran denying any ongoing negotiations with the US.

Domestic factors such as a slowdown in manufacturing activity, as evidenced by the eased Manufacturing PMI in July, have also played a role. The rupee has tested key resistance levels at 95.20 and maintained support at 95.80. The rupee's path depends on the RBI's policy decision and the movement of the dollar. If the dollar index rebounds and breaks above the support at 99.50, the rupee could fall to 96-96.20.

Conversely, a weaker dollar and a break below 99.50 could lead to a deeper decline to 98.80 or even 98. The overall outlook remains uncertain, with the rupee potentially fluctuating within the range of 95 and 96 in the near term, as the RBI may aim to maintain stability.