Rupee closes at a 2-month high on possibility of de-escalation West Asia war, softening crude, weak dollar

The Indian rupee (INR) reached a two-month high on Thursday, closing at 94.47 per USD, a level not seen since early September. This surge was driven by expectations that the United States would de-escalate the Middle East conflict following the Democrats' victory in the midterm elections. The rupee also benefited from a weakening US dollar, lower US Treasury yields, and softer crude oil prices.

Dilip Parmar, Senior Research Analyst at HDFC Securities, noted that the rupee had been trending upward for five consecutive days, supported by risk-on sentiment, foreign fund inflows, and lower crude oil prices. The near-term outlook for the INR-USD pair is positive, with psychological support at 94.00 and resistance at 94.90. Axis Bank's economic research team suggests that the US political shifts could impact the INR fair value, as a retreat from the Middle East conflict could improve trade terms, lower the cost of capital, and protect productivity.

However, the long-term conflict is expected to continue, leading to continued fiscal spending and drawing down on savings. This has pushed the financeable current account deficit to zero and a basic balance deficit since 2023. The bank's estimates show that the fair value of the rupee is still weaker than current levels, although depreciation of the fair value may no longer outpace actual depreciation.

Rajeev Sharan, Head of Research at Brickwork Ratings, added that the war premium in energy prices had finally cracked, with Brent crude plunging below USD 100 per barrel after the US midterm elections reduced fears of military escalation with Iran. The combined effect of a softer dollar index, a 1,400-point Sensex rally, and foreign stock inflows has turned the macro tide in India's favor.

However, the rupee's early dip shows that even with a crashing oil price and foreign cash flooding in, the rupee will climb slowly due to importers and the RBI buying cheap dollars to protect the foreign exchange reserves.