India rupee recovery gains support from equity inflows and weaker dollar

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India rupee recovery gains support

Highlights

Rupee expected to open near 94.70 as a 0.3% drop in the dollar index and U.S. election expectations weigh on the dollar.
Foreign investors purchase over $700 million of Indian shares on Tuesday, with total inflows for the past three sessions reaching $1.5 billion.
Indian equities rally 5% in four sessions as AI stock weakness and speculation around capital gains tax cuts drive renewed foreign interest.

Market drivers behind the rupee move

As reported by Reuters, traders expect the rupee to open around 94.70 after a firmer close in the previous session, helped by a 0.3% drop in the dollar index. U.S. equity futures and Treasuries also fall as investors position for election results that indicate momentum for the Democratic Party.

Prediction market Kalshi prices in a 100% probability of the Democratic Party taking control of the House and 99% odds of securing a Senate majority, pointing to a possible shift in control of both chambers of Congress. Analysts at ING Bank say U.S. midterm results are unlikely to trigger structural foreign exchange changes, but the dollar could face near-term pressure if Democrats win both the House and the Senate.

ING also says concerns over tighter regulation under a Democratic-controlled Congress could weigh on AI stocks, with spillover effects on the dollar. Across Asia, currencies react only modestly, while regional equities extend losses in line with declines in U.S. equity futures.

Equity inflows lift support for India

The recent weakness in the AI-led trade is supporting Indian equities, which investors increasingly view as offering a degree of hedge. Indian stocks have underperformed in recent months in part because AI-related themes had pulled foreign capital toward other markets.

A pullback in AI shares now appears to be encouraging some rotation back into India. The country's equities rally 5% over the past four sessions, while foreign investors buy more than $700 million of Indian shares on Tuesday, taking total purchases in the last three sessions to about $1.5 billion.

Buying interest also strengthens on expectations that India may cut or scrap the long-term capital gains tax for foreign investors. That combination of renewed equity inflows and a softer dollar is likely to offer the rupee additional near-term support.

Our earlier article on the RBI’s rupee-defence operations explained that the central bank had drawn down a large share of the FX resources it raised through special measures, using spot intervention and swaps to support the currency. We noted that high oil prices, higher U.S. Treasury yields, and persistent foreign equity outflows were key drivers of pressure on the rupee, raising questions about how long the RBI can lean against depreciation.

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