Indian Rupee Unlikely to Breach 97 Against US Dollar Despite Oil Prices, US Bond Yields, Says Expert

The Indian rupee is unlikely to breach the 97 mark against the US dollar despite soaring crude oil prices and rising US bond yields, supported by robust Reserve Bank of India (RBI) foreign exchange reserves, according to Naveen Mathur, Director of Commodity & Currencies at Anand Rathi Shares & Stock Brokers.

The domestic currency has faced significant pressure from external macroeconomic factors, touching 96.13 during the session before cooling slightly to 96.08. Brent crude sustaining above $100 a barrel, West Texas Intermediate (WTI) at $95, and US 10-year bond yields crossing the 5.20% mark have collectively weighed on the currency. Without these macroeconomic elements settling down, immediate respite remains unlikely.

However, the central bank’s formidable foreign exchange reserves are expected to defend critical levels. The Foreign Currency Non-Resident (FCNR) deposit scheme successfully mobilised approximately $133 billion, bolstering the RBI’s balance sheet and pushing total reserves from around $670 billion to $786 billion. “So they will use this particular reserves, the FCNR deposits which have come in,” Mathur noted, adding that this financial firepower makes a drop to 97 highly improbable.

India imports 85% to 86% of its crude oil requirements, primarily from Russia, Venezuela, and West Asia, making the economy highly sensitive to elevated energy costs. While dollar strength and high oil prices could push the currency toward 96.50 on the depreciative side, the expected trading range remains bounded, with appreciation potential up to 95.50.

Domestic macroeconomic indicators remain stable despite these external headwinds. August Consumer Price Index (CPI) inflation stood at exactly 4.82%, well within the RBI’s tolerance band of 4% plus or minus 2%. This marks a significant improvement from April 2022, when inflation hovered around 8 to 9%.

To further anchor the currency, the central bank is anticipated to tighten monetary policy moderately. There is a 60% to 70% probability of a 25 basis points (bps) rate hike in October, bringing the rate to 5.5%.

A steeper 50 bps increase is off the table because inflation remains under control. “I don’t think the RBI would send a signal that they are in a panic situation of doing 50 bps, and the probability too is on the 25 bps,” Mathur explained, projecting that a measured hike will provide adequate support to hold the rupee in the 95.50 to 96 range.For the full interview, watch the accompanying video