Rupee Opens Stronger Against Greenback As Dollar Index, Oil Prices Ease

The rupee strengthened against the US dollar on Tuesday as dollar index and oil prices eased in Asia session. However, this may prompt traders to rush to cover the US currency, which will weigh on it as the day advances, according to market participants.

The rupee strengthened 6 paise to open at 86.52 against the dollar. The Indian unit posted the worst intraday decline against the dollar since Feb 6, 2023 on Monday. It slumped 62 paise to record low of 86.60 a dollar in the previous session. It settled at the record closing low of 86.58 a dollar, according to data on Bloomberg.

The dollar index erased some of the gains from Monday's session in Asia session, which limited losses in the Indian unit. The index declined 0.36% to the day's low of 109.56 so far on Tuesday. It was at 109.56 as of 9:07 a.m.

Dips to the dollar is still a 'buy' as demand for dollars is good enough and rupee may still be overvalued by about 7%, according to Anil Kumar Bhansali, head, treasury and executive director, Finrex Treasury Advisors LLP.

The dollar index, which measures the strength of the greenback against major currencies, rose to over two-year high on Monday.

"Markets are getting spooked by the idea that the Fed's policy in 2025 might be more restrictive than anticipated. Outflows from domestic equity markets and rising Brent crude prices is also impacting rupee. For USDINR, 86.30 acts as a support while 86.80 a resistance," said Kunal Sodhani, vice president, Global Trading Centre, Shinhan Bank.

Crude oil future prices also gave up some gains in Tuesday's session, but it's still trading near over five-month high. The supply outlook remained unclear as traders assessed the aftermath of strict sanction on Russia's exporters, insurance companies, and tankers.

As of 09:08 a.m. the February future contract of the crude oil was trading 0.35% down at 80.73 a barrel on inter continental exchanges. It settled at 81.01 a barrel on Monday.

The current forecast suggests that INR will slide to 87 a dollar by mid-2025. Allowing the currency to adjust is critical for domestic liquidity, Sonal Verma, an economist from Nomura, said.