The Indian rupee opened 4 paise stronger on Thursday, trading at 85.97 against the US dollar, compared to the previous close of 86.01, as currency markets digest a wave of global and domestic financial pressures.
Despite the marginal gain, the rupee remains under strain due to ongoing concerns, including heavy demand from oil companies, continued sell-offs by foreign investors, and a narrowing yield spread between Indian and US government bonds.
On May 22, the spread between Indian and US 10-year bonds fell to a 20-year low of 164 basis points, according to Bloomberg. This marks the narrowest gap since July 28, 2004, when the spread stood at just 135 basis points. The Indian 10-year bond yield was reported at 6.2496%, while the US equivalent surged to 4.5866%, driven by rising concerns over the American fiscal deficit.
The narrowing spread has diminished the appeal of Indian bonds for global investors, leading to a slump in carry trade attractiveness. This shift contributed to foreign institutional investors (FIIs) pulling out Rs 5,045 crore from Indian equities on May 22, a stark contrast to their Rs 2,200 crore net purchase just a day earlier.
However, the market found some cushion as domestic institutional investors (DIIs) stepped in, making net purchases worth Rs 3,715 crore, according to provisional data from the National Stock Exchange (NSE).
Analysts suggest that the rupee’s near-term outlook will remain vulnerable to global bond market dynamics, foreign fund flows, and crude oil prices, with the narrowing bond yield spread likely to play a pivotal role in shaping investor sentiment.
As global economic uncertainties continue to unfold, investors are keeping a close watch on bond yields and capital flows to gauge the rupee’s trajectory in the weeks ahead.