The local currency had staged a recovery in recent sessions, supported by easing volatility and improving portfolio flows. However, fresh concerns over a possible escalation in the US-Iran conflict shifted the market’s focus back to oil prices, a key driver for the rupee.
Brent crude extended its gains in Asian trade after rising more than 8% over the previous two sessions. The move followed fresh US military strikes on Iran and retaliatory attacks by Iran on Kuwait and Bahrain, raising fears of supply disruptions in the region.
For India, which imports the bulk of its crude oil requirements, higher oil prices typically increase the country’s import bill, widen the current account deficit and add to inflationary pressures. These factors generally weigh on the rupee and can also dampen foreign investor sentiment.
The impact of rising crude prices was visible across domestic financial markets on Wednesday (July 8). The benchmark 10-year government bond yield posted its biggest single-day rise in more than three months, while Indian equity markets fell around 2%, marking their sharpest decline in over three months.
Market participants are also closely tracking developments around the Strait of Hormuz, a key global oil shipping route, as any disruption could further tighten energy supplies and keep crude prices elevated.
Adding to the pressure on emerging market currencies, including the rupee, were higher US Treasury yields after minutes of the US Federal Reserve’s June policy meeting showed policymakers remained concerned about inflation. Markets have since raised expectations that the Fed could keep interest rates higher for longer, supporting the US dollar.
With geopolitical developments and crude oil prices back at the forefront, analysts expect the rupee’s near-term direction to remain closely linked to global risk sentiment and movements in the energy market.
-With Reuters inputs
