The Indian rupee fell 0.4% against the US dollar on Tuesday, logging its sharpest single-day decline in two months as rising oil prices and expectations of higher US interest rates weighed on the currency.The rupee closed at 95.96 per US dollar, compared with 95.55 in the previous session, according to Reuters. The currency had touched a more than one-month low during the session.The decline came as most Asian currencies also weakened, while higher crude prices raised concerns over India’s import bill and inflation.
Oil prices add pressure
Brent crude rose nearly 2% to around $107.70 a barrel after attacks on Saudi Arabian energy infrastructure left the kingdom’s East-West oil pipeline offline and raised concerns over efforts to ease shipping risks in the Gulf.Oil prices have climbed nearly 20% so far this month, increasing pressure on energy-importing economies such as India.The rise in crude has also fuelled concerns over inflation, while expectations of higher US interest rates have supported the dollar.The dollar index, which measures the US currency against a basket of six major currencies, was trading at 99.60 in early trade, up 0.21%.
RBI dollar sales limit losses
Likely dollar sales by the Reserve Bank of India through state-run lenders helped contain the rupee’s losses, Reuters reported.The central bank was also likely to have conducted dollar-rupee sell/buy swaps for a fourth consecutive trading session as part of measures to drain excess rupee liquidity from the banking system.RBI Governor Sanjay Malhotra had said the central bank could use open-market bond sales and foreign-exchange swaps to absorb liquidity. The RBI later announced plans to conduct bond sales worth Rs 1 trillion ($10.43 billion) in September.MUFG said the increased rupee liquidity resulting from the RBI’s foreign-exchange measures could add to inflation risks.“We continue to think the risks tilt towards inflation in India rising faster than expected, with the significant boost to INR liquidity from RBI’s forex measures a potential additional impetus,” MUFG said in a note.
Bond yields rise as rate-hike bets grow
Signs of broader inflationary pressure and rising oil prices have also strengthened expectations of interest-rate hikes, putting pressure on Indian government bonds.The yield on India’s 10-year benchmark government bond rose 7 basis points to 7.09% on Tuesday, according to Reuters.MUFG expects the rupee to weaken gradually against the dollar, forecasting USD/INR at 95.50 by December 2026 and 96.50 by June 2027.“We are forecasting USD/INR at 95.50 by December 2026 and 96.50 by June 2027, implying a gradual depreciation in INR against the dollar and a modest underperformance against other Asian currencies,” the bank said.The rupee had opened at 95.84 against the dollar, down 30 paise from its previous close of 95.54, according to PTI.Forex and equity markets had remained closed on Monday for Ganesh Chaturthi.The combination of higher crude prices, Middle East tensions and stronger demand for the dollar has kept pressure on the Indian currency and financial markets.
