Mumbai: The Indian rupee opened flat at 94.47 against the US dollar on Thursday, pausing after an eight-session winning streak, as forex traders weighed continued dollar inflows linked to the Jio Platforms IPO against rising crude oil prices and month-end dollar demand.
The currency is expected to trade in a narrow range of 94.15-94.60 during the day, with traders looking to IPO-related flows and positioning for direction while oil prices remain a risk. The rupee had settled at 94.46 to the dollar on Wednesday.
The rupee's rally has been one of the sharpest in recent memory. From around 96.60-96.70 just over a week ago, the currency has climbed to its highest level since the first week of September, powered by a combination of Reserve Bank of India measures, active intervention, and dollar flows related to the $3.2 billion Jio Platforms IPO.
On Wednesday, the rupee broke past the 94.70 level, which had acted as a key technical hurdle throughout last week. The break could prompt further unwinding of long-dollar positions, a treasury official at a bank said. The unwinding of positions, particularly in the non-deliverable forward market, has further fuelled the rupee's rally, traders said.
The Jio Platforms IPO has been the dominant story in the currency market this week. The issue opened for subscription on Wednesday and saw strong demand on its opening day, led by institutional investors. Bids for the anchor portion had totalled more than 30 times the shares on offer, underlining the scale of foreign interest in the listing.
The mechanics of how an IPO moves a currency are well understood by traders. Foreign investors typically use sell/buy foreign exchange swaps to manage their dollar flows for IPO allotments — selling dollars for rupees in the spot market and agreeing to buy them back at a later date, usually less than a week. While these swaps are designed not to disturb spot-market dollar supply directly, some of the flows do filter through to the spot market, bankers said.
Once shares are allotted, investors can unwind these positions and sell dollars outright to fund their investments, leading to further dollar supply, traders said.
"With Jio-related flows continuing, the rupee could strengthen further despite a stable dollar index and crude prices," a forex trader at a private bank said. "Exporters will continue to sell on upticks, while importers are buying on dips, but largely for their near-term requirements."
Apart from the expected IPO-related inflows, the rupee has drawn support from continued dollar sales by the Reserve Bank of India, which has been intervening around the 95-per-dollar level to boost the currency.
But oil remains the key vulnerability for the local currency, and traders remain wary. Brent crude futures rose to around $110.32 a barrel on Thursday after settling at $108.82 on Wednesday, amid renewed concerns over Middle East supplies and shipping disruptions. Brent rose 1.5 per cent to inch past $110.50 during the session. India's crude oil basket stood at $115.55 a barrel on October 20, with its premium easing slightly.
The trigger for the latest spike was geopolitical. More attacks by the Houthis in Saudi Arabia prompted the United States to order diplomats and their families to leave its missions in the Kingdom, raising fears of a wider disruption to oil supplies from the region. Traders are also wary of Red Sea shipping risks and threats to oil infrastructure in Saudi Arabia.
Sustained high oil prices pose a risk to the rupee by raising India's import bill and adding to pressure on the current account and imported inflation. India imports the bulk of its crude, and every sustained rise in prices worsens the trade balance.
There is "material" risk of the currency reversing its ongoing rally, the treasury official said, pointing to oil as the key threat.
Traders also expect dollar outflows after the Jio IPO subscription and allotment process is completed, which could remove one of the main props of the current rally. Month-end payment demand and the US Federal Open Market Committee's rate decision could add to currency volatility and offset some of the support from equity-related inflows.
The dollar index stood at 101.72, close to Tuesday evening levels, after slipping to an intraday low of around 101.50. Earlier weakness reflected lower US Treasury yields and improved risk sentiment, while escalating Middle East tensions continued to provide some support to the greenback.
For importers, the currency's current levels offer an attractive opportunity to buy dollars amid high oil prices, but expectations of continued RBI intervention and supportive flows over the next two to three days could make them cautious about rushing in, the treasury official said.
The next few sessions will be decisive. If Jio-related flows continue and the RBI keeps its hand on the market, the rupee could test stronger levels. But if crude prices keep climbing on Middle East tensions, the eight-session rally could quickly run out of steam.
The central bank's role in the current rally deserves attention. The RBI has been intervening around the 95-per-dollar mark through a series of measures and active market operations, signalling that it views excessive volatility as undesirable. The intervention has been calibrated — the bank has not tried to peg the currency, but has leaned against sharp moves in either direction.
The unwinding in the non-deliverable forward market has amplified the spot-market move. As the rupee strengthened past key technical levels, traders who had built long-dollar positions were forced to unwind them, creating a feedback loop that pushed the currency higher still. The break past 94.70, a level that had capped the rupee all of last week, was the clearest sign that positioning — not just fundamentals — was driving the move.
A stronger rupee, if sustained, has mixed implications for the economy. It helps contain imported inflation, particularly on fuel, which matters at a time when the RBI's monetary policy committee is watching inflation risks closely. But it also makes Indian exports less competitive at the margin, a concern for exporters already dealing with an uncertain global demand environment.
The Jio Platforms IPO, the largest market event of the season, will remain the focal point for currency traders through the allotment process. A $3.2 billion issue drawing anchor bids of more than 30 times the shares on offer is the kind of event that can move markets on its own — and in this case, it has coincided with an RBI intervention campaign to produce one of the strongest weekly rallies the rupee has seen this year.
(Reporting based on Reuters and Business Recorder.)