Indian rupee rally tested as AI jitters ease

what happened

The recent rally in the Indian rupee may face a test on Monday, as a tentative lull in AI-related market anxiety could slow the flow of diversification money into local assets, Reuters reports. Traders expect the currency to open between 93.92 and 93.98, after it settled at 93.9050 to the dollar on Friday. Last week the rupee gained more than 1%, supported by a sizeable rise in foreign investment in Indian equities, which topped $4 billion, and by lower oil prices.

South Korea and Taiwan, markets that had benefited strongly from the AI trade, fell last week and saw foreign outflows. After the Democratic Party's sweep in the US midterm elections on Wednesday, technology shares sold off across the US and Asia, raising worries about growth in the sector. On Friday that nervousness eased somewhat, with the Nasdaq recovering and futures pointing higher. South Korean and Taiwanese markets rose on Monday.

A nearly 20% slump in Brent crude last week gave foreign investors an extra reason to favour Indian assets. A currency trader at a bank said the trade linked to AI and the trade not linked to it are now well established, and how each plays out will determine the direction of Indian equities and the rupee. At the same time, a surprise upside in US payrolls boosted expectations that the Federal Reserve could raise rates in December, and most Asian currencies weakened on Monday.

why it matters

Capital flows and oil prices have been the biggest sources of pressure on the rupee over recent months. A sustained turnaround in equity inflows, combined with cheaper oil, could give the currency much-needed support, but for now it remains exposed to shifts in AI market sentiment and Fed rate expectations.

market impact

Rupee: capital inflows and cheaper oil support the currency, though risks remain

• ▲Indian rupee pressure up — foreign capital inflows and lower oil prices support the currency

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instruments