Fresh Gulf hostilities set to weigh on rupee, traders eye central bank cushion

MUMBAI: The Indian rupee is poised to make a weaker start on Wednesday, tracking declines in oil-sensitive Asian peers as fresh hostilities flared in the ​Gulf after U.S.-Iran peace talks stalled.

The Indian rupee is expected to open in the 95.35-95.38 range, ‌per traders, having settled at 95.2650 on Tuesday.

The U.S. military said on Wednesday that Iranian missile attacks on Bahrain, Kuwait and other regional targets were either thwarted or failed, as diplomacy between Washington and ​Tehran showed little progress.

The renewed hostilities sparked the third consecutive daily rise in oil ​prices, with Brent crude rising 1% to nearly $97 per barrel.

Asian currencies were ⁠mostly weaker, with the Indonesian rupiah dipping to a record low.

On top of worries over ​high energy prices, which threaten to widen India’s current account deficit, persistent foreign portfolio outflows ​remain a drag on the rupee as well. Foreign investors net sold over $800 million worth of Indian stocks on Tuesday, per provisional exchange data.

The impact of such outflows, though, has been mitigated by frequent ​interventions by the Reserve Bank of India across market segments.

“It’s quite likely that the RBI ​will limit the rupee’s fall today as well and keep volatility muted heading into the monetary policy ‌decision,” ⁠a senior trader at a state-run bank said.

A majority of economists expect the central bank to keep rates unchanged on Friday but markets have started to clamour for rate hikes as spillovers from the Iran war put the RBI in razor-edge policy bind over inflation, ​growth and the rupee.

“RBI’s ​commentary and guidance ⁠with regard to the future path of the policy rate shall be most keenly watched. Meanwhile, policymakers may revise their inflation forecast ​higher, but refrain from lowering their growth projection for now,” analysts ​at Nuvama Research ⁠said in a note.