USD/INR: Rupee Remains Range-Bound, Likely to Turn Volatile

The Indian rupee opened marginally lower but remained range-bound in lackluster trade against the U.S. dollar in early session Friday amid volatility seen in the domestic equity market.

The dollar to rupee conversion today opened at 74.54 against the U.S. currency, up from Thursday’s close of 74.5375. The rupee has lost over 170 paise in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened about 19 paise so far in this month.

“The rupee traded in a narrow and tight band throughout the day. Yesterday, it managed to sustain well above 74.50 levels and ended with gains of 4 paise. The Dollar index posted moderate gains. A drop in US weekly jobless claims to a new pandemic low supported gains in the dollar along with hawkish Fed comments,” noted analysts at ICICI Direct.

“The USD to INR is seeing contracting volatility while the trading range has been narrowing for a few sessions. We feel the rupee should move towards 74.4 levels in the coming days whereas upsides seem limited. The dollar to rupee July contract on the NSE was at 74.65 in the last session. The open interest fell 3.2% for the July series.”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.05% lower at 92.583 – not far from its three-month high of 92.844.

The world’s dominant reserve currency, the USD, is expected to rise further over the coming year, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to INR pair higher.

It is worth noting that sustained foreign fund outflows, higher oil prices, and firm U.S. dollar will continue to weigh on the rupee.

Global oil benchmark Brent futures traded nearly flat at $73.48 per barrel at the time of writing. Last week, oil prices spiked to a three-year high of $77.84 per barrel as OPEC+ failed to reach an agreement. Higher oil prices would push up the inflation expectations and widen India’s trade deficit, which could hurt the Indian rupee.

The benchmark equity indices BSE Sensex was trading 25.4 points or 0.05% higher at 53,188.10, while the broader NSE Nifty advanced 12.75 points or 0.08% at 15,936.00. Foreign institutional investors were net sellers in the capital market on Thursday as they offloaded shares worth Rs 264.77 crore, as per exchange data.