The Indian rupee lost ground this week, halting its recent recovery. Rising oil prices and growing bets that the US Federal Reserve will take a tougher stance on interest rates outweighed the support from strong foreign investment inflows.
Earlier in the week, those inflows had lifted the currency to its highest level in more than six months. That gain did not hold.
The rupee closed at 94.24, down 0.2% from the previous close, and lost 0.3% over the week.
Foreign investors have been buying heavily. They have net bought more than $8 billion of Indian stocks so far in November, and another $800 million has gone into Indian debt.
Traders are also watching for signs that the Reserve Bank of India is buying dollars to rebuild its foreign exchange reserves. ING said in a note that the central bank is likely to use periods of rupee strength to add to its reserves. The bank also said that while the risk of a sharp fall in the rupee has eased, there is limited scope for a sustained rally. It expects the currency to stay broadly stable rather than strengthen much further.
US Treasury yields rose this week. The two-year yield, which is sensitive to changes in interest rate expectations, hit a one-month high. Investors are weighing the possibility that the Fed could raise rates by a larger-than-usual 50 basis points next month.
Higher US bond yields, along with renewed worries about rising oil prices, weighed on Indian markets. Stocks and bonds both came under pressure. The Nifty 50 index fell, while the yield on the 10-year government bond rose by more than 6 basis points to 7.31%.
The rupee had recovered from near record lows reached last month. At that time, the central bank stepped up support by curbing demand for dollars.
Fresh data added to the strain. India’s merchandise trade deficit for October widened to a one-year high.
Attention now turns to India’s foreign exchange reserves figures for the week ended November 6, which are due after the market closes.