The rupee strengthened by 19 paise to reach 70.98 against the dollar on Monday at the interbank forex market.
A recent report by CARE ratings analyses the short-term appreciation trend of the rupee. It cites the fall of oil prices in the global market and net sales of foreign portfolio investments (FPIs) as two probable reasons for the trend.
The graph below shows the monthly average value of the rupee against the dollar.
India imports over 80% of its oil. According to Petroleum Planning & Analysis Cell (PPAC), the average crude oil import dependency for India stood at 82.8% of the total crude oil consumption in 2018, higher than 81.7% in 2017.
Iran is one of the countries India is heavily dependent on for crude oil due to geographic proximity that results in lower shipping costs and favourable financial conditions like long periods of credit.
However, the U.S. sanctions on Iran’s export of crude oil hit India's supply. Later, India was included in the list of seven countries to which Iran could export oil.
India’s import of large quantities of oil, and falling global price of oil significantly reduced India’s oil bill, favourably impacting the rupee.
In the 2018 calendar year, India also turned a net seller of FPIs for the first time since 2011, thereby strengthening fundamentals, according to the CARE report. FPIs are instruments through which foreign investors can trade debt and equity in India. If India is a net seller, it indicates that investors cumulatively invested more funds than they pulled out, which is a positive sign.
Another important factor is the impact of U.S. shutdown -- currencies of emerging markets made small gains due to the 35-day closure of the U.S. government.
Despite these factors, the rupee is set to remain volatile in the face of the upcoming budget and election season.
