This month, the local unit has gained 2.79% against the dollar, Bloomberg data showed, making the rupee the third best performer after the Chilean peso and the Indonesian rupiah.
The rupee closed at 71.46 to a dollar on Tuesday. Currency and debt markets in Mumbai were shut on Wednesday due to the Eid festival.
Overseas investors have resumed purchases of domestic assets as a 17 percent slump in crude prices this month should boost corporate profits and reduce concerns over a runaway current account deficit.
“Falling crude prices make India assets attractive to overseas investors," said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered in Mumbai. “The rupee now has ground to gain due to the expected fall in trade deficit. The local unit can rise another 2-3% by this year end.”
Foreign funds have been net buyers of domestic securities in November. They have net invested Rs 10,523 crore so far, showed data from the National Securities Depository. More than half of the money came into debt securities at Rs 5,686 crore, the highest monthly inflow this financial year.
The rupee faced multiple headwinds during the year from rising oil prices, the widening trade deficit, and a liquidity stress in the para-banking industry. All these factors have collectively weighed on the rupee.
“Many of these factors have either been resolved or have been temporarily managed,” said Gopikrishnan.
Brent crude has fallen more than 25 percent since the four-year high of $86.74 reached on October 3 this year. There are apprehensions of a supply glut, with expectations of a demand contraction next year. The benchmark gauge now hovers around $63.5 per barrel.
Indias current account deficit (CAD), or the excess of overseas spending over revenues, was 2.4% of GDP in the June quarter.
The fall in oil prices should help reduce Indias fuel import bills while aiding companies with higher share of imports to reduce operational costs.
“With moderation in oil prices and the consequent resumption in FII inflows, the fear of sustained deterioration in Indias CAD and balance of payment has been put to rest,” said B Prasanna, group executive and head of markets at ICICI Bank. “The rupee has recovered substantial ground and is likely to appreciate more if oil prices sustain at the current levels.”
The rupee has otherwise been one of the worst performing emerging market currencies this calendar year. The central bank has been reportedly intervening in the market selling dollars via state-owned banks.
“Undershooting of the current inflation readings, the benign inflation trajectory, and the potential liquidity additive measures including OMO purchases from the RBI add to the positive environment for rates,” said Prasanna.
Open Market Operation is a device to manage banking system liquidity.