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

Over $4.1 billion flowed into Indian equities from overseas this November. The Indian Rupee traded close to seven-month highs following the purchases.
A 165,000 increase in October Nonfarm Payrolls far outpaced forecasts, helping to contain the Greenback’s losses.
More than 78% odds of a 25-basis-point Fed rate rise are indicated by CME FedWatch.

USD/INR trades near 93.80. The pair is extending its decline for an eighth consecutive day in early European trading on Monday. Substantial foreign capital inflows are supporting the Indian Rupee (INR), keeping the pair close to seven-month lows. Overseas purchases of Indian equities have exceeded $4.1 billion so far in November, the largest monthly net inflow since September 2024.

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Capital is also rotating back into regional Asian assets as market participants pull away from global AI-linked technology shares. With investors reassessing stretched technology valuations, India has become a major beneficiary of interest in its relatively undervalued equity market.

Lower crude oil prices are easing inflationary pressure and weighing on the US Dollar (USD), adding to the difficulties for USD/INR. Energy prices retreated after US President Donald Trump described further military action against Iran as "highly unlikely," provided progress continues on Iran's nuclear programme 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 in the Republicans' recent midterm election defeats.

Stronger US labour market figures, however, have reinforced expectations of monetary tightening and could curb further Greenback losses. The CME FedWatch tool now puts the probability of a 25-basis-point interest rate increase at the December Federal Open Market Committee (FOMC) meeting above 78%, following a sharp rise.

Robust US employment data are reinforcing the hawkish outlook for the Fed. Against a consensus forecast of 65,000, October Nonfarm Payrolls (NFP) climbed by 165,000, following September's revised increase of 60,000. The Unemployment Rate also fell to 4.1%, below the 4.2% forecast.

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

Indian Rupee: Key Questions Answered

Which forces drive movements in the Indian Rupee?

External developments have a particularly strong influence on the Indian Rupee (INR). Key drivers include crude oil prices, given India's heavy reliance on imported oil; the US Dollar's value, as most trade is settled in USD; and the scale of foreign investment. The Reserve Bank of India (RBI) also has a major influence through its interest rate settings and direct intervention in FX markets to stabilise the exchange rate.

How does Reserve Bank of India policy affect the Indian Rupee?

To support trade, the Reserve Bank of India (RBI) intervenes actively in foreign exchange markets to keep the exchange rate stable. Interest rate adjustments are another policy tool, used to keep inflation at its 4% target. Higher rates generally support the Rupee through the ‘carry trade’: investors borrow in lower-interest-rate countries and invest in countries offering relatively higher rates, earning the difference.

Which macroeconomic indicators shape the Indian Rupee's value?

Inflation, interest rates, GDP growth, the trade balance and foreign investment inflows all help determine the Rupee's value. Faster economic growth can attract additional overseas investment and lift demand for the currency. A narrowing trade deficit will eventually strengthen the Rupee, while higher interest rates also provide support, particularly higher real rates, which are interest rates minus inflation. Greater risk appetite can encourage inflows of Foreign Direct and Indirect Investment (FDI and FII), benefiting the currency as well.

What effect does inflation have on the Indian Rupee?

When inflation is high, especially relative to India's peers, it generally weighs on the Rupee by reflecting a loss of value through excess supply. Higher inflation also makes exports more expensive and results in more Rupees being sold to fund foreign imports, putting further pressure on the currency. However, it typically prompts the Reserve Bank of India (RBI) to raise interest rates. That can support the Rupee by attracting greater demand from international investors. Lower inflation has the reverse effect.