Indian rupee surprise Friday recovery faces test from weak peers, fragile risk

Mumbai received a surprise flow-driven recovery of the Indian rupee on Friday, but its sustainability may be tested by weak Asian currencies, a deteriorating risk mood, and falling oil prices, according to traders. The rupee opened largely flat at 94.94-94.98 to the US dollar on Monday, and traders anticipate it to remain range-bound around the 95-per-dollar level.

The local currency experienced a significant drop to 95.28 on Friday before reversing course due to heavy dollar selling by a large foreign bank. The cause of the foreign bank's dollar selling remains unclear. The rupee's Asian counterparts were mostly down, suffering from the US equity sell-off and rising bond prices as investors sought safety amid concerns over the AI spending-led rout.

However, India is viewed as a hedge against the technology-driven decline, potentially attracting foreign inflows. The Reserve Bank of India's net short dollar position in the forward market reached an all-time high of $240 billion in September, up from $200 billion the previous month, likely driven by dollar inflows sourced from banks under the RBI’s special FCNR(B) deposit scheme and later swapped with the central bank.