Can rupee recover from its worst fall in over a month due to rising oil prices?

Synopsis

The Indian rupee weakened to 86.20 per dollar due to rising crude oil prices following Israeli strikes on Iran, but closed at 86.08/$1 after likely RBI intervention. Brent crude surged to $75 per barrel, impacting risk sentiment and pushing the 10-year bond yield to 6.40% before settling at 6.36%. Geopolitical tensions created a fragile mood for bonds.

Mumbai: The Indian rupee weakened by 60 paise to touch 86.20 per dollar on Friday, its worst fall in over a month due to rise in crude oil prices amid Israeli strike on Iran. The currency however closed stronger at 86.08 per dollar, likely due to intervention by the Reserve Bank of India, traders said. Rupee had closed at 85.60/$1 on Thursday.

The 10-year bond yield touched 6.40% levels in the early hours of trading, before easing and closing at 6.36%, up two basis points from its previous close.

The rupee traded between the range of 86.20/$1 to 85.93/$1, strengthening mildly in between due to central bank intervention and muted dollar sales by foreign banks, traders said.

Agencies

Brent crude oil prices rose to $75 per barrel on Friday, from $68 per barrel the day before as Israeli strikes on Iran's nuclear and military facilities hit risk sentiments.

A rise in crude oil prices is inflationary for India and adds pressure on the rupee as the country is a major importer of the commodity. A $10 per barrel increase in crude oil prices can widen the current account deficit by 0.4% of the GDP and add up to 35 basis points in retail inflation, according to Reuters.

The RBI likely sold dollars via state-run banks in the first half of the trading session, but in a muted manner, traders said.

"The possible intervention by the RBI was only up to a certain level and did not make any effort to bring down to 85.70 levels. But a key resistance amid uncertainty in the Middle East would be at 86.25/$1 levels," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.

For bonds too, the mood was fragile amid geopolitical tensions, traders said. "Since there has been a selloff and the yields touched 6.40%, we will be able to see some buying next week," a bond trader at a primary dealership said.

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