The Indian rupee commenced the trading week on a stronger note, appreciating by 6 paise to open at 85.49 against the US dollar on Monday. This upward movement is largely attributed to favorable domestic macroeconomic indicators and enhanced investor confidence. A significant contributor to this positive sentiment is India's robust Gross Domestic Product (GDP) growth of 7.4% in the fourth quarter (Q4), which exceeded market forecasts and underscored the resilience of the construction and manufacturing sectors. This strong economic performance has bolstered optimism regarding India's overall economic prospects, thereby supporting the local currency.

Key Drivers: Several factors are contributing to the rupee's appreciation. Firstly, the better-than-expected GDP figures have positively surprised the market, leading to increased confidence among foreign investors and potentially paving the way for greater capital inflows into the country. Secondly, global crude oil prices have remained relatively stable, alleviating concerns about India's import bill and the pressure it exerts on the trade deficit. Additionally, demand from exporters at the beginning of the month, coupled with routine corporate financial flows, are also providing underlying support to the rupee in early trading sessions.

Factors Capping Gains: However, the extent of the rupee's gains might be limited by certain external factors. The US Dollar Index (DXY) continues to exhibit firmness, reflecting cautious global sentiment as markets anticipate key macroeconomic data from the United States later this week, notably the non-farm payroll report. Furthermore, ongoing geopolitical uncertainties and a general sense of global risk aversion among investors could exert downward pressure on emerging market currencies, including the Indian rupee.

Outlook: Looking ahead, market participants will be keenly observing the Reserve Bank of India's (RBI) monetary policy decision, which is scheduled for later this week. This decision is expected to provide further direction for the rupee. While analysts widely anticipate that the central bank will maintain its current policy stance, its commentary and actions concerning liquidity management and inflation control will be critical, as these elements can significantly influence currency movements.