Daijiworld Media Network – New Delhi
New Delhi, Jul 15: The Indian rupee weakened beyond the 96-per-dollar mark for the first time in less than two months on Tuesday, hit by a sharp rise in crude oil prices and a stronger US dollar after renewed US strikes against Iran reignited tensions in West Asia.
The rupee fell to an intraday low of 96.23 before closing at 96.20 against the US dollar, down 0.6 per cent from the previous session. It was the weakest level for the domestic currency since May 22 and marked the steepest decline among Asian currencies during the day.
The slide came as Brent crude futures surged more than 4per cent to $87 a barrel amid concerns over disruptions to global oil supplies following the escalation of conflict around the Strait of Hormuz. Higher crude prices typically increase India's import bill, widen the current account deficit and add pressure on the rupee.
"The levels of the rupee will be an interplay of oil prices and the US interest rate cycle. If oil prices stay elevated, then the US Fed will be forced to hike rates," said Anindya Banerjee, head of commodity and currency research at Kotak Securities.
The rupee had earlier recovered after touching a record low of 96.96 on May 20 and remaining around the 96 level until May 22. The Reserve Bank of India's special swap facility for Foreign Currency Non-Resident (FCNR) deposits, External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) had boosted market sentiment and supported the currency. However, the renewed hostilities between the United States and Iran have reversed that trend.
"The rupee's depreciation on Tuesday was driven by negative global sentiment following the blockade of the Strait of Hormuz, which pushed crude oil prices. Rising US Treasury yields and sustained importer demand further weighed on the Indian currency. While the RBI is expected to intervene to curb excessive volatility, the rupee is likely to remain under pressure as long as oil prices stay elevated," said Ritesh Bhansali, deputy chief executive officer of Mecklai Financial Services.
Market participants said the RBI intervened by selling dollars in the market to prevent a sharper fall in the rupee.
"The external geopolitical tensions and the rise in crude oil prices have put pressure on the rupee. The RBI was seen selling dollars in the forward market to support the rupee, but outflow of the dollar to safe havens like the US Treasury led to the fall. But we expect a pullback once tensions settle down," said the treasury head of a large bank.
US Treasury yields also climbed, with the benchmark 10-year yield rising to 4.6278 per cent amid growing expectations that the US Federal Reserve could raise interest rates due to the inflationary impact of higher oil prices. The rise followed US President Donald Trump's announcement of a blockade on Iranian ports, which fuelled speculation that the Fed could deliver two rate hikes by April next year.
Foreign exchange traders said fears of a prolonged conflict prompted foreign institutional investors (FIIs) to shift funds towards safe-haven assets such as US Treasuries, leading to capital outflows from emerging markets, including India.
Despite the latest decline, traders expect the rupee to regain some ground as foreign exchange inflows under the RBI's new dollar-swap scheme gather pace. Around $10 billion has already been mobilised through the scheme.
"The FCNR(B) flows through the special schemes of the RBI are expected to support the rupee and the range expected to be 96-97 in the medium term," Banerjee said.
Banking experts also believe easing geopolitical tensions and moderation in crude oil prices would help stabilise financial markets.
"The encouraging flows under the FCNR(B) scheme should hold well for the rupee. Today's rout is not restricted to the rupee; there has been a sell-off in the equity as well as the bond markets. Once the rhetoric dies down and crude comes off, we should see an all-round recovery," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.