Rupee opens 4 paise higher at 96.41 against US dollar

The Indian rupee opened 4 paise higher at 96.41 against the US dollar on Tuesday, 21 July, even as elevated crude oil prices and a bearish shift in derivatives market positioning continued to underpin demand for the greenback.

The domestic currency came under pressure in the previous session after slipping past the 96.50 mark for the first time in two months. According to traders, the decline would likely have been steeper had the Reserve Bank of India (RBI) not intervened in the foreign exchange market to curb volatility.

The rupee's near-term outlook has weakened in recent weeks as crude oil prices surged following renewed hostilities between the US and Iran. Brent crude briefly climbed above $91 per barrel on Monday before easing to around $88.50, but continued to remain at elevated levels.

Although oil prices have retreated marginally, geopolitical risks continue to cloud sentiment. Adding to concerns, Yemen's Iran-backed Houthi rebels announced plans to impose a naval blockade on Saudi Arabia, raising fears of a broader regional conflict that could further disrupt global energy supplies and keep pressure on oil-importing currencies such as the rupee.

Rising oil prices keep bond markets on edge

US Treasury yields edged higher as investors assessed the inflationary impact of elevated crude oil prices. Higher energy costs typically feed into transportation, manufacturing and consumer prices, keeping inflation risks alive and prompting investors to demand higher yields on government bonds.

Fed Rate cut Hopes improve, but tightening risks persist

The US Federal Reserve has largely taken a back seat this week, with policymakers entering the pre-meeting blackout period ahead of the upcoming policy decision. In the absence of fresh commentary, markets are relying on recent economic data to gauge the central bank's next move.

Softer inflation and resilient labour market data have significantly reduced expectations of a rate hike at the July Federal Reserve meeting. According to the CME FedWatch Tool, the probability of a July rate hike has dropped to 16.6%, down sharply from more than 40% a week ago.

However, the outlook beyond July remains less certain. Markets continue to assign a nearly 64% probability of a rate hike in September, indicating that expectations for further monetary tightening have been postponed rather than abandoned.

Safe-Haven demand supports the US dollar

Despite easing expectations of an immediate rate hike, the US Dollar Index (DXY) climbed back towards the 101 mark as investors sought the safety of the greenback amid escalating geopolitical tensions in the Middle East. The stronger dollar continued to exert pressure on emerging market currencies, including the Indian rupee.

FPI outflows add to rupee headwinds

Domestic factors also remained unsupportive for the rupee. Foreign portfolio investors (FPIs) remained net sellers of Indian equities, withdrawing ₹1,121 crore in the previous session. The continued outflows, coupled with elevated crude oil prices and a firm US dollar, have added to the pressure on the domestic currency.

Rupee Outlook

According to Amit Pabari, MD, Research Team, CR Forex Advisors, technically, USDINR has now achieved the 96.50 milestone that the market had been targeting over the past several sessions. A sustained move above 96.50 could open the door towards 97.00–97.50 in the coming days. On the downside, 96.10–96.20 should now act as the first support zone.

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