The Indian rupee staged a sharp recovery on Monday, strengthening against the US dollar as crude oil prices plunged following reports of a US-Iran peace agreement and the reopening of the strategically vital Strait of Hormuz. The fall in oil prices, a weaker dollar and a strong rally in Indian equities boosted sentiment for the domestic currency.
The rupee rose to around 94.45 against the dollar in early trade, marking a gain of about 2.6 percent from its record low of 96.96 touched on May 20.
The recovery was driven primarily by a steep decline in global crude oil prices after reports emerged that Washington and Tehran had reached an agreement to end hostilities.
Indian stock markets opened sharply higher, adding further support to the rupee.
Rupee strengthened to around 94.45 per dollar.
The currency has recovered nearly 3 percent from its all-time low.
Dollar index slipped to a 10-day low near 99.3.
Improved global risk appetite reduced demand for safe-haven assets.
Crude oil prices dropped about 5 percent after the announcement of the peace pact.
Brent crude futures fell to around $83 per barrel, while US benchmark West Texas Intermediate (WTI) traded near $80 a barrel. Oil prices are now at their lowest levels since March.
India is the world's third-largest importer of crude oil. Lower oil prices:
Reduce the country's import bill.
Ease pressure on the current account deficit.
Help contain inflation.
Support the rupee by reducing demand for dollars needed for oil imports.
The reopening of the Strait of Hormuz is particularly significant because nearly one-fifth of the world's crude oil and liquefied natural gas shipments pass through the waterway.
Investor confidence improved after indications that commercial shipping through the Strait of Hormuz would resume normally.
Although the agreement is yet to be formally signed, reports suggest the official ceremony could take place later this week in Switzerland.
The easing of geopolitical tensions triggered a broad risk-on rally across global markets, benefiting emerging-market currencies including the rupee.
Market analysts believe the combination of lower oil prices, easing geopolitical tensions and recent RBI measures could help the rupee maintain its recovery.
According to currency market experts, the rupee could move towards the 93-94 range in the coming weeks if crude prices remain subdued and risk sentiment stays positive.
For now, the trajectory of crude oil prices and developments surrounding the US-Iran agreement will remain the biggest drivers of the rupee's direction.
