Indian rupee relief rally to stall as oil soars on US-Iran talks collapse

MUMBAI: The Indian rupee is set to come back under pressure on Monday after a two-week relief rally, weighed down by ​a jump in oil prices following the failure of Washington and ‌Tehran to reach a deal to halt the war.

The rupee is expected to open at 93.10-93.20 to the US dollar, having settled at 92.7275 on Friday, per ​traders.

Brent crude for June delivery climbed 7% to $102 a barrel, while ​US equity futures and Asian shares fell.

US Treasury yields ⁠and the dollar rose, reversing last week’s moves that had followed a US-Iran ceasefire.

That ​ceasefire appeared increasingly fragile after weekend talks in Pakistan failed to yield an agreement to end the ​war.

Following the breakdown in negotiations, US President Donald Trump said on Sunday that the U.S. Navy would begin blockading the Strait of Hormuz.

“Not only does this restrain exports from ​Persian Gulf oil producers, it will restrict Iran’s ability to export ​oil and will exacerbate the supply disruptions the market is experiencing,” ANZ Bank said.

Trump further ‌warned ⁠that oil prices may remain elevated through the U.S. midterm elections in November, a rare acknowledgement of the potential political fallout from his decision to attack Iran six weeks ago.

Prolonged high oil prices would be a concern for oil-importing ​India, stoking inflation worries, ​undermining the ⁠economic outlook and adding pressure on the rupee.

Double whammy

Beyond higher oil prices, the rupee faces the risk of reduced dollar ​inflows after banks completed the forced unwinding of arbitrage trades.

The unwinding ​was triggered ⁠by the Reserve Bank of India’s move to cap banks’ onshore forex positions, a process that had supported the rupee over the past two weeks by forcing dollar ⁠sales ​in the domestic market.

However, the deadline for banks ​to bring their positions down expired on Friday, meaning the rupee will no longer benefit ​from those supportive flows going forward.