The relief rally for the Indian rupee came to a halt as the currency is once again hovering around the 94 level mark against the US Dollar. Traders said that the pressure on the currency came on increased dollar demand caused by the rise in oil prices.
The domestic currency opened at the 94.00 mark against the US dollar and slipped down to its three-week low of 94.15 against the greenback in early trade, and ended today’s trade at 94.11 against the US Dollar. So far this week the currency has declined by over 1%
On Wednesday, Brent crude futures rose over the $100/bbl mark and quoted the $103/bbl levels in today’s session, adding to the pressure for the domestic currency.
Geopolitical uncertainties continue to weigh on emerging market currencies as stalled peace talks between US and Iran keep the Strait of Hormuz largely closed. The latter transits over a fifth of the world’s global energy flows.
#1 Concerns surrounding oil disruptions weigh on currency
On Wednesday, Tehran seized two ships at the Hormuz route, Reuters reported. It added that with this Iran has tightened its grip over the waterway passage. Alongside, the US Navy’s blockade of the trade route continues to hold.
The vitiations in the prolonged West Asia conflict has the markets worried that the Hormuz blockade could continue to add supply disruptions for India, which is a net importer of oil.
“In simple terms, the situation looks like this: Ceasefire Extension → Continued Restrictions → Supply Disruptions → Higher Oil Prices → Pressure on Emerging Markets,” explained Amit Pabari, Managing Director at CR Forex Advisors.
“The pressure on rupee is obviously from the oil companies buying of $ (dollar) as it needs to fulfill country’s daily needs for oil and other petroleum products as well as fertilizers requirements,” said Anil Kumar Bhansali ,Head of Treasury and Executive Director at Finrex Treasury Advisors LLP.
#2 Dollar index strength adding to the downside for rupee
The dollar index which measures the strength of the dollar against a basket of six major currencies is also trending up on day. Experts pointed that safe-haven buying for dollars over uncertainties in the US-Iran standoff is adding to the upside for the greenback.
“On the other side, the US dollar is holding steady near 98.00 levels and that’s quietly adding pressure on the rupee,” Pabari added.
Previously, the Indian rupee had breached the 94 level mark on March 23, and depreciated to its intra-day record low on March 30, following which RBI imposed certain restrictions on rupee derivatives trading to help limit the currency’s fall.
The dollar remains steady, which is also capping any upside in INR. Overall, the bias remains weak, with the rupee likely to stay event-driven and volatile in the near term,” said Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities.
#3 Outlook for Rupee
“Technically, USD/INR has built a strong base in the 92.80–93.00 zone, which is now acting as a cushion,” Pabari said.
He added that with the prolonged uncertainty the bias remains tilted upward. “A gradual move toward 94.00–94.20 cannot be ruled out unless there is a clear breakthrough on the geopolitical front,” the analyst said.