Key facts
- India's central bank likely intervened by selling dollars to support the rupee.
- The rupee strengthened to 96.5725 per US dollar on July 24, avoiding a record low.
- Brent crude oil surpassed $100 a barrel due to Middle East supply disruption fears.
- India imports nearly 90% of its crude oil, making it susceptible to price shocks.
- Analysts suggest the rupee could weaken further if oil prices stay high.
India's rupee, one of Asia's weakest currencies, received a reprieve on July 24 as the Reserve Bank of India (RBI) likely intervened by selling dollars. This action helped the currency avoid a record low, which had been threatened by surging oil prices and a weak stock market.
State-run banks were observed selling dollars shortly before the market opened, a move widely attributed to the RBI. This intervention pulled the rupee up to 96.50 per US dollar from an earlier low of 96.80, and it closed the morning session up 0.1% at 96.5725. The currency's all-time low was 96.96 in May.
The pressure on the rupee stems from a sharp increase in crude oil prices, with Brent crude jumping 7% to exceed $100 a barrel for the first time in two months. This surge was fueled by escalating geopolitical tensions in the Middle East, including attacks on oil tankers and threats of military action. Analysts warn that if Brent crude remains near $100, the USDINR pair could surpass 97.00, with a potential move to 97.50.
India's heavy reliance on oil imports, meeting nearly 90% of its needs externally, makes it particularly vulnerable to such price shocks. Higher energy costs exacerbate inflation, strain the country's external balances, and increase demand for dollars, thereby pressuring the rupee.
Traders are closely monitoring the RBI's response, noting that the intervention on July 24 appeared stronger than earlier in the week. While the RBI maintains it intervenes only to curb excessive volatility, some traders believe the central bank is signaling its intent to deter speculative bets against the rupee. However, underlying fundamental pressures suggest further depreciation is possible.
Despite a series of measures introduced in June to attract foreign currency deposits and strengthen the rupee, the currency's performance has been hampered by uncertainty over policymakers' tolerance for weakness and global factors. Unlike Indonesia and the Philippines, India has maintained its interest rates, with economists expecting no change from the RBI in August.
Indian equities also declined, mirroring broader Asian market weakness, with investors focusing on evolving trade policies. The US has imposed a 10% duty on goods from India, and similar tariffs are in place from the EU, Taiwan, and Japan.