Rupee opens 6 paise lower at 95.66 against US dollar

The rupee opened 6 paise lower at 95.66 against the US dollar on Tuesday, 18 August, as rising crude oil prices and US bond yields added to pressure on the currency. The rupee was also weighed down by the RBI's recent decision to advance the deadline for its foreign-currency deposit swap facility for non-resident Indians.

Brent crude rose above $91 a barrel, while the 30-year US Treasury yield climbed to its highest level in more than two decades, increasing pressure on emerging-market currencies.

The US-Iran truce expired, with Tehran signalling a shift towards a “fully offensive” military posture, raising concerns over global energy supplies and pushing oil prices higher. According to a Reuters report, US President Donald Trump also told a Fox News reporter that Iran should surrender.

The rise in crude prices contributed to higher US Treasury yields, further tightening financial conditions for the rupee.

The currency came under additional pressure after the RBI shortened the foreign-currency deposit swap facility window by one month to 31 August. The move, which surprised several bankers, pushed the rupee below 95.50 on Monday despite broad dollar weakness, and central bank intervention failed to prevent further depreciation.

US fiscal pressure keeps bond yields elevated

A widening US fiscal deficit is adding another layer of pressure to the bond market, with increased Treasury issuance raising concerns over supply, inflation and higher term premiums, market experts said.

The 10-year US Treasury yield is hovering near 4.7%, while the 30-year yield touched 5.3% last week, its highest level in 19 years. Experts said persistent volatility in US yields could become an additional risk for global markets as investors reassess the outlook for government borrowing and interest rates.

Narrowing yield premium puts EM bonds under pressure

Higher US yields are also affecting emerging markets by reducing the additional return investors earn for taking on EM risk. The yield spread between emerging-market bonds and US Treasuries is already close to a 20-year low, experts said.

For India, this is particularly important as foreign debt inflows have provided some support to the rupee this year. A further narrowing of the yield differential could weaken the appeal of Indian debt and reduce an important source of foreign currency inflows.

Rupee faces pressure as RBI support nears deadline

The rupee came under pressure on Monday, with USD/INR depreciating 19 paise to close at 95.61, giving up its previous session's gains.

Experts said the RBI's decision to advance the closure of its FCNR(B) swap facility is also beginning to weigh on sentiment. The facility has attracted nearly $57 billion in inflows, but fresh deposits will qualify for the facility only until August 31, instead of the earlier September-end deadline.

With one of the rupee's key sources of support now approaching its deadline, the currency could face greater pressure in the coming weeks.

Strait of Hormuz keeps oil risk alive

At the same time, Brent crude remained near $90 a barrel, with attacks on shipping through the Strait of Hormuz keeping concerns over supply disruptions elevated.

Experts said uncertainty over the reopening of the key shipping route continues to pose a significant risk for India, given its dependence on imported crude. Iran has maintained that the US blockade must be lifted before negotiations can progress, keeping the outlook uncertain.

Weaker dollar offers some relief

The US dollar remains one of the few factors cushioning the rupee. Expectations of a Federal Reserve rate hike have eased, with the probability of a rate increase next month falling to roughly one-third from more than 40% a few weeks ago.

The Dollar Index has remained subdued near 99.50, providing some relief to emerging-market currencies. Experts said a softer dollar could slow the rupee's depreciation, although elevated oil prices, US yields and fading capital-flow support remain key risks.

Rupee Outlook

According to Amit Pabari, MD, Research Team, CR Forex Advisors, technically, the 95.20 to 95.30 zone is likely to act as an important support area. With the rupee breaking above 95.50 yesterday, the probability that USD/INR will gradually move toward the 96.20 to 96.50 region in the coming days is clearer.

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