Rupee Under Pressure as Oil Prices Surge Following Israel’s Strike on Iran
After Israel began attacking Iran, the RBI stepped in and sold dollars, which helped the rupee bounce back from a low of 86.20 to 86.05 versus the US dollar.
The Indian rupee plummeted on Friday due to a spike in oil prices following Israel’s strikes on Iran, which prompted the central bank to intervene and stop any losses, dealers said.
Markets experienced a surge in risk aversion as a result of the incident. Safe havens increased, U.S. market futures declined, and Asian currencies and stocks declined. At one time, Brent crude rose as much as 11%.
The rupee fell in response, hitting its lowest level in two months at 86.20 to the dollar. Most likely, the Reserve Bank of India (RBI) stepped in to stabilise the currency and reduce volatility. A trader told Reuters that the central bank probably stabilised the rupee around 86.05 by selling US dollars through state-run banks.
According to dealers, the RBI usually opposes abrupt changes in the spot market, particularly those brought on by outside shocks. At 86.12, the rupee was last quoted.
An FX dealer at a private bank stated, “The RBI probably intervened in small size because the price action was stretched at the open.” “Having said that, you can’t expect this dip (in dollar/rupee) to hold for long looking at oil prices.”
India imports between 80 and 85 percent of its petroleum needs, thus rising oil costs are a major drawback. A persistent increase in crude exacerbates the current account and trade deficits and pushes up domestic inflation. Furthermore, refiners’ dollar demand rises in response to rising oil prices.
Madhavi Arora, chief economist at Emkay Global Financial Services, stated, “There is a risk of this escalating, but earlier once Israel attacked Iran, the latter retaliated and both claimed success and denied major damage and the tensions faded.”
“However in this case, more details are awaited and in the near term oil would be highly volatile.”
In the meantime, forward premiums increased for all tenors, indicating that higher oil prices might have an effect on Indian interest rates. The annualised premium for the 1-year USD/INR increased by 6 basis points to 1.92%.
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