Oil worries return for Indian rupee as US-Iran tensions flare again

MUMBAI: The Indian rupee, which tumbled to a one-month low in the previous session, is likely to remain under pressure on Thursday ​on fears that renewed U.S.-Iran hostilities could once again send oil ‌prices spiking.

The Indian rupee is set to open flat-to-weaker against the dollar, following Wednesday’s 0.6% slide to 85.5550.

Brent crude, after rallying more than 8% over the previous two sessions, rose ​another 1% in Asian trade as the U.S. military carried out fresh ​strikes on Iran, prompting retaliatory attacks by Iran on Kuwait and ⁠Bahrain.

The impact of oil prices on the local currency had receded to ​the background but renewed hostilities have dragged it back into focus. For India, ​a major oil importer, higher crude prices widen the current account deficit, fuel inflation and weigh on growth.

They could also test portfolio inflows, which had only recently begun to ​recover.

Concerns over higher oil prices have already begun to ripple through Indian ​markets. The benchmark 10-year bond yield rose 7 basis points on Wednesday, the most for ‌a ⁠single session in over three months, and Indian stocks fell 2%, their steepest drop in over three months.

Geopolitics has returned to “the driver’s seat” for markets following the latest escalation, ANZ said in a note.

“The focus in the coming ​days will be on ​flows through the ⁠Strait of Hormuz,” the bank said.

The run-up in oil prices reinforced recent inflation concerns and pushed U.S. Treasury yields ​higher. Minutes of the Federal Reserve’s June meeting added ​to the ⁠upward pressure on yields, compounding the headwinds for the rupee and other Asian currencies.

The minutes showed policymakers grew more concerned about inflation at the June meeting, with ⁠some ​participants seeing a case for raising rates.

U.S. interest-rate ​futures implied a roughly one-in-three chance of a rate hike this month, while odds of a ​move by September were about two-in-three.