Rupee Closes Stronger Against US Dollar After Two-Sessions Of Weakness

The Indian rupee started the week stronger against the US Dollar, following two consecutive sessions of weakness amid softening crude oil prices and a declining Dollar index.

The rupee pared some of the early gains, but still closed stronger by 4 paise to close at 86.57 the US dollar. The domestic currency opened stronger at 84.48 against the greenback, according to Bloomberg data. It had settled at Rs 86.61 a dollar on Friday.

Dollar index, which measures the strength of the greenback against the six major currencies, declined after a one-day rise on Friday. Before that, it had fallen for four consecutive sessions.

Oil prices fell on Monday as investors await Donald Trump's comments on Russia oil sanctions in his inauguration speech tonight. As of 3:11 p.m., the March futures contract of Brent Crude was at $80.60 a barrel, 0.2% down, while WTI Crude February futures fell 0.2% to $77.71 a barrel.

According to a note by Mecklai, markets are focused on President-elect Donald Trump’s inauguration, with concerns that his proposed trade tariffs could drive inflation and heighten trade war risks.

USD strength is likely to continue and the RBI will allow for greater FX flexibility, highlighting the risk of its forecast being overshot, Nomura said in a report. "That said, over the medium term (that is, through H2 2025), we see drivers for a softer USD," it said. "After the tariff and trade tensions in H1 2025, if negotiations emerge in H2, markets are likely to begin to turn more optimistic (a softening of the USD and lower rates)."

The brokerage's view would likely be supported by a few other factors, such as slowing US growth in H2 2025; ECB ending its rate cuts by Q3 2025; and other medium-term drivers such as US twin deficits, global FX diversification, risk of USD/US asset holdings unwind, an increase in asset allocation into EM/Asia, potential pressures from Trump for a weaker USD and Fed cuts.

"This would represent a significant relief for INR, but we believe potential downside for USD/INR is limited, as the RBI is likely to reaccumulate FX reserves," it said. "The risk is that INR will underperform the majority of its main trading partners’ currencies in a softer USD environment."