Rupee falls 20 paise to open at 95.17 against US dollar amid rise in crude oil prices

The Indian rupee depreciated 20 paise to open at 95.17 against the US dollar on Wednesday, 8 July, as a sharp rise in crude oil prices and higher US Treasury yields weighed on investor sentiment amid renewed geopolitical tensions in the Middle East.

The domestic currency had posted its strongest single-day gain in more than three weeks on Tuesday, supported by heavy dollar selling in the non-deliverable forwards (NDF) market. Before that recovery, the rupee had declined nearly 1% over the previous week.

The rebound in crude oil prices has intensified inflation concerns, triggering a selloff in US Treasuries. The yield on the benchmark 10-year US Treasury note climbed to 4.5650%, its highest level in nearly a month.

Meanwhile, the US dollar index edged above 101, while most Asian currencies and regional equity markets traded lower.

Crude oil and a stronger dollar emerge as key headwinds for the rupee

Currency market experts believe the recent rally in crude oil prices and the strengthening of the US dollar have once again become major pressure points for the Indian rupee, after briefly supporting the domestic currency.

Brent crude climbed above $76 per barrel on Wednesday, taking its weekly gains to more than 6%. The sharp rise marks a reversal from earlier expectations of an oil supply surplus, following renewed geopolitical tensions in the Middle East despite OPEC+ raising production quotas and key regional producers increasing output.

Experts noted that higher crude prices are particularly significant for India, which imports the bulk of its oil requirements. A sustained increase in Brent crude raises the country's import bill, widens the trade deficit and adds to inflationary pressures, making the rupee more vulnerable.

Stronger dollar and higher Treasury yields add to pressure

Market participants also pointed to renewed strength in the US dollar as investors sought safe-haven assets amid geopolitical uncertainty.

The US dollar index climbed back above the 101 mark, while rising oil prices revived inflation concerns and prompted traders to increase expectations of further interest rate hikes by the US Federal Reserve. Higher US Treasury yields have further boosted the dollar, reducing the appeal of emerging market currencies, including the rupee.

According to experts, the combination of elevated crude prices and a stronger dollar has reversed two of the biggest supportive factors for the rupee seen earlier this week.

FPI inflows remain the key cushion

Despite the headwinds, foreign portfolio investment (FPI) flows continue to provide some support to the domestic currency.

Experts noted that FPIs turned into net buyers of Indian equities during the second half of June, investing nearly $1.5 billion after having been net sellers earlier in the month. These inflows, aided by global index rebalancing and value buying, boosted dollar supply in the domestic forex market and helped cushion the rupee.

However, they cautioned that with global risk sentiment deteriorating amid escalating geopolitical tensions, the sustainability of these inflows remains uncertain. Any slowdown in FPI investments could remove an important source of support for the rupee in the near term.

Rupee Outlook

According to Amit Pabari, MD, CR Forex Advisors, yesterday's dip in USDINR appears to be a buying opportunity rather than the start of a sustained rupee recovery. Brent crude has bounced from a key support level, signalling a move back towards $85 per barrel, while the dollar index is approaching a crucial resistance level near 101.50. A breakout above this level could open the way towards 102.50 and 104.00.

“As a result, dips in USDINR are likely to remain buying opportunities, with the pair expected to gradually move towards the 95.80–96.00 zone,” said Pabari.

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