Rupee climbs to highest level in five months on softer dollar, strong FII inflows

The Indian rupee braved multiple headwinds in April including U.S. trade policy flip-flops and India-Pakistan tensions to come out stronger on the back of inflows into equities and as exporters ramped up dollar sales.

On the last trading day of the month, the local unit touched its year-to-date high and closed at 84.4875 against the U.S. dollar, up 0.91% on the day, and the highest since November 29.

What’s behind the gains in Indian rupee?

The currency rose 1.2% on the month, its second consecutive monthly rise, which helped extend a sharp reversal in the rupee’s fortunes after it plumbed to an all-time low of 87.95 in February.

Broad weakness in the dollar – on the back of concerns about a spate of trade and other policy changes under U.S. President Donald Trump – helped the rupee after it rallied more than 2% in March.

The dollar index, meanwhile, was nursing losses of nearly 4.5% on the month, its third consecutive monthly fall.

A “renewed risk-off in (U.S.) equities combined with falling front-end yields as Fed rate cuts become more likely will only reinforce the downside momentum for the dollar,” MUFG Bank said in a note, pointing to the impact of policy uncertainty.

Indian exporters ramped up hedging activity in April, traders said, which further helped the rupee alongside positive cues from strength in its Asian peers.

On the day, traders pointed to likely inflows into Indian stocks, hedging-related dollar sales from exporters and a lowering of short bets on the currency as it raced past a key technical resistance level.

There were heavy inflows from U.S.-based banks, while the central bank was absent and did not absorb the flows, leading to a large one-way move in the second half of the session, a treasury head at a foreign bank said.

Positive sentiment surrounding a potential trade deal between India and the U.S. was also a tailwind for the rupee towards the end of the month even as some traders cautioned that an escalation in India-Pakistan tensions could renew pressure.

On the month, India’s benchmark Nifty 50 equity index was up 3.5% while the benchmark 10-year bond yield fell 22 basis points.