Indian Rupee rebounds as rally in US yields and oil prices hits a pause

The Indian Rupee (INR) saw a significant rebound against the US Dollar (USD) on Friday, as the USD/INR pair dropped to near 95.75 from a previous seven-week peak of 96.10. This improvement was largely due to a pause in the rally of both oil prices and US Treasury Yields. As of now, the MCX Crude Oil contract for September 21 trades at around Rs.

9,688, down from its multi-month high of Rs. 10,238 earlier in the week. Analysts at Deutsche Bank suggest that the drop in oil prices has brought relief to currencies of oil-dependent economies like India. This relief is attributed to news that Saudi Arabia is increasing tanker loads in the Gulf and ramping up crude sales from the Strait of Hormuz, aiming to restore about half of the East-West pipeline's capacity within days and return it to full capability in about six weeks.

Additionally, the cooling down of US Treasury Yields, which had surged recently, also contributed to the INR's strength. The 10-year US Treasury Yields have decreased to a week's low near 4.94%, following a 19-year high of 5.04% on Tuesday. Lower US bond yields make risk-sensitive assets, including the Indian Rupee, more appealing.

Further, the Federal Reserve's recent interest rate hike decision has enhanced the credibility of central banks, putting downward pressure on US Treasury Yields. The Indian Rupee's sensitivity to external factors, such as the price of Crude Oil, the value of the US Dollar, and the level of foreign investment, is evident. The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate and to meet its inflation target of 4% by adjusting interest rates.

Higher interest rates generally strengthen the Rupee, as it attracts more foreign investment through the carry trade. Macroeconomic factors such as inflation, interest rates, economic growth, balance of trade, and foreign investment inflows also influence the Rupee's value.