Foreign inflows underpin Indian equities as Indian Rupee holds near multi-month highs

The Indian Rupee held close to seven-month highs, supported by foreign equity purchases exceeding $4.1 billion this November.
Losses in the Greenback were constrained by October Nonfarm Payrolls, which increased by 165,000 and far outstripped expectations.
A 25-basis-point Fed rate hike carries a probability of more than 78%, according to CME FedWatch.

Strong overseas capital inflows into the Indian Rupee (INR) are keeping USD/INR close to seven-month lows. Trading near 93.80 in Monday's early European session, the pair is extending its decline for an eighth consecutive day. Foreign investors have bought more than $4.1 billion of Indian equities so far in November, their highest monthly net purchases since September 2024.

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India is also benefiting as investors shift funds back towards regional Asian assets amid a wider sell-off in global AI-linked technology shares. A reassessment of stretched technology valuations has made India's relatively undervalued equity market a key destination for this interest.

Lower crude oil prices are easing inflationary pressures and weighing on the US Dollar (USD), adding to the pressure on USD/INR. Energy prices retreated after US President Donald Trump described further military action against Iran as "highly unlikely," provided progress on Iran's nuclear programme continues and the Strait of Hormuz stays open. Trump also recognised that the unpopular Middle East conflict, which had earlier pushed energy costs higher, was a major factor behind the Republicans' recent midterm election defeats.

Expectations of tighter monetary policy following stronger US labour market figures could, however, restrict further losses in the Greenback. The CME FedWatch tool puts the likelihood of a 25-basis-point interest rate increase at the December Federal Open Market Committee (FOMC) meeting at more than 78%, following a sharp rise.

Robust US employment data provide firm support for expectations of a hawkish Fed stance. Against a consensus forecast of 65,000, October Nonfarm Payrolls (NFP) climbed by 165,000, following September's revised reading of 60,000. The Unemployment Rate, meanwhile, eased to 4.1%, coming in below the 4.2% forecast.

For clearer signals on the Federal Reserve's next policy steps, traders and other market participants are looking ahead to Tuesday's Consumer Price Index (CPI) report, followed by Friday's Producer Price Index (PPI) release.

Indian Rupee: Frequently Asked Questions

Which key drivers shape the Indian Rupee's movements?

External developments have a particularly strong influence on the Indian Rupee (INR). Important drivers include Crude Oil prices, given India's heavy reliance on imported Oil; the US Dollar's value, since most trade is carried out in USD; and the scale of foreign investment. The Rupee is also significantly affected by the interest rates set by the Reserve Bank of India (RBI) and its direct intervention in foreign exchange markets to stabilise the exchange rate.

How do Reserve Bank of India policy decisions affect the Indian Rupee?

To facilitate trade, the Reserve Bank of India (RBI) intervenes actively in the foreign exchange market to keep the exchange rate stable. It also adjusts interest rates in an effort to hold inflation at its 4% target. Rate increases generally support the Rupee through the ‘carry trade’: investors borrow in countries where interest rates are low and deploy those funds in countries offering relatively higher rates, earning the difference.

Which macroeconomic conditions affect the Indian Rupee's value?

Inflation, interest rates, economic growth (GDP), the trade balance and foreign investment inflows are among the macroeconomic drivers of the Rupee's value. Faster growth can attract additional overseas investment and increase demand for the currency, while a narrowing trade deficit eventually strengthens it. Higher interest rates also support the Rupee, particularly when real rates, or interest rates minus inflation, rise. Greater risk appetite can encourage inflows of Foreign Direct and Indirect Investment (FDI and FII), providing further support for the currency.

How do changes in inflation affect the Indian Rupee?

The Rupee generally comes under pressure when inflation rises, especially if it exceeds that of India's peers, as this reflects a loss of currency value through oversupply. By making exports more expensive, inflation also results in more Rupees being sold to pay for foreign imports, further weighing on the currency. However, rising inflation typically prompts the Reserve Bank of India (RBI) to increase interest rates. This can support the Rupee by attracting greater demand from international investors. Lower inflation has the reverse effects.