Indian rupee slumps as elevated crude, Treasury yields support dollar

MUMBAI: The Indian rupee reversed nearly all of the previous session’s rally on Monday, pressured by rising oil prices, fragile risk appetite and patchy corporate flows.

A raft of measures aimed at supporting the currency battered by the impact of the months-long Iran war had boosted the rupee to its best day in two months on Friday.

However, rising crude and renewed expectations of a Federal Reserve rate hike have offset their positive impact.

The Indian rupee ended down 0.8% in its sharpest fall in four weeks to settle at 95.7075 per dollar.

Still, analysts say the measures to attract dollars would lead to $30 billion to $50 billion of money flowing in.

“The RBI has provided meaningful support to the rupee, but external factors will remain crucial. Any escalation in U.S.-Iran tensions, leading to a stronger dollar or higher oil prices, could temporarily push the pair upwards,” said Amit Pabari, managing director at FX advisory firm CR Forex.

Brent crude jumped over 4% after Israel launched fresh strikes on Lebanon despite an existing truce, weakening hopes of a broader regional de-escalation and delaying the possible resumption of shipping through the Strait of Hormuz.

The crude spike brought external risks back into focus for the rupee, given India’s heavy dependence on imports and the currency’s sensitivity to swings in energy prices.

Higher oil prices typically widen India’s import bill, pressure the current account, and increase demand for dollars from oil companies.

Stronger-than-expected U.S. jobs data has reinforced expectations that the Fed could raise interest rates before the end of this year, which pushed Treasury yields higher.

Elevated U.S. yields tend to support the dollar and weigh on emerging-market currencies by narrowing the relative appeal of local assets.

While speculators stepped in to sell dollars earlier in the day, corporate outflows weighed on the currency, traders said.