From US midterms to cheaper oil: What’s driving the rupee’s five-day rally?

The Indian rupee has gained for five consecutive trading sessions, opening at 94.35 against the US dollar on Thursday, as falling crude oil prices, a weaker dollar and renewed foreign investor buying improve sentiment towards Indian financial markets.

The currency gained 29 paise at the open compared with its previous close of 94.64 on Wednesday. The recovery comes as Brent crude prices plunged 8.7 per cent in the previous session, falling below $100 a barrel. Brent was trading at around $93.50 on Thursday, down another 1 per cent.

The improvement in sentiment was also visible in the stock market. India’s benchmark indices opened near three-month highs on Thursday, with the Nifty 50 rising 1.66 per cent to 24,357.3 and the Sensex gaining 1.83 per cent to 78,719.72 as of 9.18 am IST.

A key trigger for the rally across markets is the outcome of the US midterm elections. The Democratic Party’s decisive victory and the Republican Party’s loss of control of Congress have prompted investors to reassess the possibility of a prolonged conflict between the US and Iran.

Markets are increasingly betting that the political setback could put pressure on US President Donald Trump to seek a negotiated exit from the conflict. This has raised hopes of lower oil prices, offering relief to India, one of the world’s largest crude importers.

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The return of foreign investors to Indian equities has provided another boost. Foreign portfolio investors bought shares worth Rs 7,284 crore ($769.65 million) on Wednesday, marking their fourth consecutive session of buying, according to provisional data.

What is driving the rupee’s five-day rally?

1. US midterm results raise hopes of an Iran war exit

The Democratic Party’s victory in the midterm elections has changed expectations around Trump’s foreign policy, particularly his approach towards Iran and support for Israel.

With Republicans losing control of Congress, Democrats are expected to have greater scope to challenge the administration’s policies. Investors are assessing whether this could increase pressure on Trump to find a diplomatic solution to the conflict.

Analysts at ING Bank said Democrats would be more confident about pushing back against Trump’s policies on Iran, support for Israel and any escalation of tariffs.

MUFG Bank said the election outcome represented a meaningful shift in the US political landscape and could lead to an unwinding of some of the political and geopolitical risk premium embedded in financial markets.

The conflict has kept oil markets on edge for more than eight months. Repeated military escalations and uncertainty over shipments through the Strait of Hormuz have raised concerns about global supplies.

2. Crude oil prices plunge below $100

The possibility of de-escalation has triggered a sharp correction in international oil prices.

Brent crude fell 8.7 per cent in the previous session before declining another 1 per cent to around $93.50 a barrel on Thursday. US West Texas Intermediate crude also came under pressure after losing more than 8 per cent in the previous session.

The correction has brought Brent to its lowest levels in more than two months as traders reassess the risk of prolonged disruptions to global oil supplies.

The Strait of Hormuz remains central to these concerns. A substantial share of global oil shipments passes through the narrow waterway, making any disruption a major risk for energy-importing countries.

3. A weaker dollar adds to the rupee’s gains

The rupee has also benefited from a decline in the US dollar index, which measures the greenback against a basket of six major currencies.

A weaker dollar generally provides support to emerging market currencies by reducing pressure on their exchange rates.

The shift in sentiment following the US election results has also supported global financial assets as investors reassess geopolitical risks and their exposure to the dollar.

For the rupee, this has provided an additional boost alongside the correction in crude prices.

4. Foreign investors return to Indian equities

Foreign investor buying has emerged as another positive development for Indian markets.

Foreign investors purchased shares worth Rs 7,284 crore on Wednesday, marking their fourth consecutive session of net buying, according to provisional exchange data.

Their return is significant because sustained foreign selling had been one of the factors weighing on Indian equities and the rupee.

Foreign investors bring dollar inflows when they purchase Indian shares. This can increase the supply of foreign currency in the domestic market and provide support to the rupee.

The broader market rally also reflected improving investor sentiment. Fourteen of the 16 major sectoral indices were trading higher on Thursday. The Nifty Smallcap 100 and Nifty Midcap 100 indices also gained more than 1 per cent each.

Why falling oil prices matter for India

India imports nearly 90 per cent of its crude oil requirements, making international energy prices a major factor in its economic and currency outlook.

When crude prices rise, Indian refiners need more dollars to pay for imports. This increases demand for the US currency and puts pressure on the rupee.

Expensive oil also increases India’s import bill, widens the trade deficit and can push up inflation through higher fuel, transportation and manufacturing costs.

A sustained decline in crude prices could ease these pressures. It would reduce India’s dollar requirements for oil imports, improve its external balance and help contain inflation.

Cheaper energy could also support economic growth by lowering input costs for businesses. Improved macroeconomic conditions may, in turn, make Indian assets more attractive to foreign portfolio investors.

This is why the latest correction in oil prices has implications beyond the currency market. It has also helped lift sentiment across equities, with the Nifty and Sensex opening near three-month highs.

Can the rupee sustain its recovery?

The rupee’s five-session winning streak and the return of foreign investors offer some relief, but sustaining these gains could prove difficult if oil prices rise again.

The recent correction in crude is largely linked to expectations of a possible diplomatic settlement between Washington and Tehran. But negotiations have yet to produce a breakthrough, and the risk of further military escalation remains.

Any fresh disruption to oil shipments through the Strait of Hormuz could reverse the recent decline in crude prices and put pressure on the rupee again.

The currency also remains exposed to foreign investor flows, movements in the dollar and broader global market uncertainty.

A currency trader at a bank told Reuters that the sustainability of the rupee’s recovery remained in question because of concerns over oil prices.

A meaningful and sustained correction in crude, the trader said, could change that equation.

For now, cheaper oil, a weaker dollar and renewed foreign investor buying have given Indian markets some breathing room. Whether the recovery continues will depend largely on the direction of crude prices and developments in the US-Iran conflict.

(With inputs from agencies.)