Key Points:
- Higher oil prices increased pressure on the import-dependent currency
- Central bank intervention helped limit the rupee’s losses
ISLAMABAD: The Indian rupee recorded its sharpest single-day decline in more than a month on Tuesday, coming under pressure from rising crude oil prices, renewed geopolitical tensions and increased demand for US dollars.
The rupee closed at around 94.82 against the US dollar, down 0.35 per cent from the previous session, marking its steepest daily fall since late July.
The decline came after the rupee had strengthened to a more than two-month high in recent sessions, supported by dollar sales by the Reserve Bank of India (RBI).
Traders said state-owned banks appeared to sell dollars on behalf of the central bank. However, intervention was aimed primarily at limiting volatility rather than defending a specific exchange-rate level.
Renewed tensions in the Middle East pushed Brent crude towards $100 a barrel, raising concerns about prolonged disruption to global energy supplies.
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India, the world’s third-largest oil importer, is particularly vulnerable to higher crude prices because an increase in the oil import bill raises demand for dollars and can widen pressure on its external balances.
Market participants also pointed to continued importer hedging and subdued foreign investment flows as additional sources of dollar demand.
The rupee remained under pressure on Wednesday, opening around 94.80 and weakening to 94.95 against the dollar in early trading as oil prices continued to rise.
The latest weakness comes after a period of heavy RBI support for the currency.
India’s central bank intervention
The central bank had intervened almost daily in the foreign exchange market last week, with state-run banks selling dollars on its behalf, helping the rupee strengthen towards 94.30 per dollar.
The RBI has also been supported by strong foreign-currency inflows, including $127.2 billion raised through the Foreign Currency Non-Resident (Bank) deposit scheme.
However, renewed oil-price pressures have reduced the effectiveness of intervention, with traders reporting that the central bank’s support appeared less forceful as the rupee breached 95 per dollar on Wednesday.
