Rupee Closes Only A Touch Lower, Tracking A Rebound In Domestic Equities

The Indian rupee closed only a touch lower on Monday from the previous session, rebounding from a fall earlier in the day, tracking a recovery in Indian equities.

While crude oil prices continued to rise on Monday, the energy-sensitive rupee, after tumbling over 0.5% to 75.73 per dollar in early trade on Monday, recovered to close at 75.35, a touch lower than 75.33 in the previous session.

The pull and push in currency markets were expected to continue on heightened uncertainty surrounding the Russia-Ukraine conflict. 

"Russian invasion of Ukraine dominated headlines causing significant volatility in markets. Recent developments - West cutting 'some' Russian banks from SWIFT, freezing Russia's Central Bank assets of $640 billion, ongoing military actions in Ukraine, suggest that a cautious stance is still warranted as there is considerable uncertainty on how events will unfold from here," wrote strategists at Nomura, in a note to clients. 

"Whether there are tit-for-tat retaliatory actions from Russia or progress is made towards some talks. These sanctions from the West are likely to eventually hurt trade flows out of Russia as over 80 per cent of FX transactions handled by Russian financial institutions are denominated in US dollar," they added.

World stocks slid, oil prices jumped, and the rouble tanked to fresh record lows on Monday, as Western countries ramped up sanctions, including blocking Russian banks from the SWIFT global payments system, in response to Russia's attack on Ukraine, the most significant assault on a European state since World War Two for the fourth straight day.

That led to risk-aversion and caution, with investors increasing their flight safety bets.

On Friday, the Indian currency had jumped nearly 0.5% after it suffered its worst session in more than 10 months the previous day. 

Sustained foreign capital outflows also weighed on the rupee last week after data showed Foreign Institutional Investors (FIIs) were net sellers in the Indian capital market. FIIs offloaded shares worth ₹ 4,470.70 crores.

The recovery in the rupee on Monday was led by a rebound in Indian bourses, which finished higher in a volatile trading session as investors turned optimistic amid hopes for Russia-Ukraine negotiations.

Domestic bourses swung between gains and losses before settling in green for the second straight session. During the day, the BSE Sensex index rebounded nearly 1,500 points to hit an intraday high of 56,325 after tanking over 1,000 points earlier. 

Still, this week, more pain is expected ahead for global risk assets on heightened volatility and keeping oil prices and inflation on a higher trajectory, pressuring the rupee.

"The decision of Western countries to impose large-scale restrictions and sanctions on Russian banks including the Russian central bank will have widespread short-term repercussions on global inflation, investment and trade and medium-term implications for globalization and geopolitics," noted strategists at Kotak.

"We see upside risks to global and domestic inflation and test of India's careful geopolitical balancing act. Higher domestic inflation poses upside risks to interest rates and downside risks to market multiples," they added.