The Indian rupee extended gains and rose to a five-month high level against the US dollar on Tuesday. The USD/INR hit a level of 74.16 intraday, last seen on March 18, 2020.

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This strength in the local currency comes amid sustained foreign capital inflows into the Indian market and recent weakness in the safe-haven US dollar.

“In USD-INR spot 74.50 was not envisaged until last week, but yesterday strong FII inflows into stocks, optimism over COVID-19 vaccine, weakness in dollar index, absence of RBI intervention and dollar long stop losses getting hit, let the spot fall sharply,” said Rahul Gupta, ‎Head Of Research - Currency - ‎Emkay Global Financial Services

Here are key reasons for the recent uptick in the rupee.

FPI Inflows

The foreign portfolio investors have purchased over Rs 46,000 crore so far in the month of August, the highest since March 2019. India has outperformed other emerging markets in terms of inflows from FPI.

Analysts believe that the recent share sale by many listed companies and falling interest rates have attracted the foreign investors’ money into Indian equities.

Weak Dollar

The dollar index, which gauges the greenback's strength against a basket of six currencies, drastically in recent times and is trading near 93.061 level. With major economies opening up after the pandemic-induced lockdowns, and signs of economic recovery emerging, the US currency has lost some of its appeal with global investors.

Meanwhile, optimism over the US-China Phase 1 deal also dragged the US dollar. A Reuters report on Tuesday said that the top US and Chinese officials had a phone call in which they reaffirmed their commitment to the Phase One trade deal agreed in January, in a positive sign after months of disputes over the COVID-19 pandemic, China's national security law, and Chinese technology firms.

Better US-China relations could improve the overall outlook on the global economy and give investors the confidence to invest in high yielding but riskier emerging markets.

COVID vaccine hopes

Hopes that a COVID-vaccine may be round the corner has also whetted investors' risk appetite. Further, the market is also viewing positively the fact that India has one of the best recovery rates in the world. With a record 66,550 patients recovering from COVID-19 in a day, the total recoveries have surged to 24.04 lakh pushing the recovery rate to 75.92 percent, while the active cases comprise only 22.24 percent of the total cases, the Union Health Ministry said on Tuesday.

No RBI intervention so far

As a rule, the RBI steps in only when there is a sharp move in the rupee against the dollar on either side. The recent appreciation in the rupee has not been sudden.

“India’s trade balance improved a lot as imports have come down. The RBI seems to okay with the trade balance situation," said Amit Sajeja, Associate Vice President - Research- Commodities & Currencies - ‎Motilal Oswal. The forex reserves are also healthy at near $540 billion. Additionally, RBI may want to suck out the excess rupee liquidity in the system. We may see the central bank lowering the base near 73.60-73.70/$ going ahead,” Saleja said.

Another analyst said: " Rupee was way past its limit touching 76 (to the dollar). RBI did not intervene because it wanted to stabilize rupee which is happening by the market forces and also because the dollar index is weakening.