The rupee opened at 95.39 per US dollar, compared with Monday’s (August 10) close of 95.30, marking a decline of 9 paise, or 0.09%.
Why is the rupee under pressure?
The latest pressure on the rupee comes as crude oil prices rise amid uncertainty over the US-Iran peace process and the reopening of the Strait of Hormuz.
Brent crude rose around 5% on Monday (August 10) and continued to trade near $88 a barrel in Asian trading on Tuesday (August 11). The oil market remains volatile, with prices responding to developments around the US-Iran negotiations.
Any agreement that leads to the reopening of the Strait of Hormuz could ease concerns over oil supplies and bring prices lower. On the other hand, a prolonged impasse could keep the risk premium in crude elevated.
For India, which imports most of its crude oil requirements, a sustained rise in oil prices can widen the import bill and increase the need for foreign currency.
RBI intervention in focus
The rupee traded in a narrow 95.10-95.30 range over the previous three sessions, with strong dollar demand limiting gains in the domestic currency.
The RBI is believed to have sold dollars around 95.25 on Monday to contain the rupee’s decline. However, the currency still ended weaker.
A currency trader quoted by Reuters said the RBI has been “consistently” supplying dollars in the market and that, without the central bank’s intervention, the dollar-rupee pair could have moved beyond 95.50.
This makes the RBI’s presence in the spot market an important factor for the rupee as it tests these levels.
How do higher oil prices affect the rupee?
Higher crude prices can affect the rupee through India’s external payments.
Indian oil companies need dollars to pay for crude imports. When the cost of those imports rises, their dollar requirement can also increase. Stronger demand for dollars can weigh on the rupee, particularly when dollar supply is insufficient to offset it.
A weaker rupee also raises the domestic cost of dollar-denominated imports, including crude oil, creating a potential pass-through to fuel and other imported goods.
US yields provide another headwind
The rise in oil prices has also pushed US Treasury yields higher. The 10-year US Treasury yield climbed towards 4.70%, reversing part of its recent decline following softer US jobs data.
Higher US yields can make dollar-denominated assets more attractive to investors, potentially supporting the US currency and adding pressure on emerging-market currencies.
What should investors watch?
The rupee’s near-term direction will depend on crude oil prices, developments in US-Iran talks, dollar demand from importers and RBI intervention.
A sustained rise in oil prices or further deterioration in the geopolitical situation could keep the rupee under pressure. Any progress towards a US-Iran agreement, particularly one that improves the outlook for traffic through the Strait of Hormuz, could have the opposite effect.
The 95.50 per dollar level will remain an important area to watch, given the recent intervention by the RBI and the strong dollar demand around current levels.
-With Reuters inputs
