RBI Intervenes as Rupee Nears Record Low on Oil Surge, Geopolitical Tensions

The Indian rupee weakened to its lowest level in two months on Monday, drawing intervention from the Reserve Bank of India as a renewed surge in crude oil prices and heightened geopolitical tensions in West Asia pushed the currency toward its record low.

The rupee closed at 96.4450 per dollar, down nearly 0.2% from its previous close, after touching an intraday low of 96.5250 — its weakest since mid-May, according to traders. The record low stands at 96.9650, touched in late May.

The RBI sold dollars through state-owned banks in both onshore and offshore markets to curb the currency’s decline, traders familiar with the matter said. The intervention, combined with a pullback in oil prices later in the session, helped the rupee recover from its day’s low.

“The Indian rupee commenced the week under pressure, weighed down by escalating geopolitical tensions that catalysed a rally in crude oil prices and risk-averse sentiments. However, anticipated intervention by the central bank successfully capped the currency’s downside,” said Dilip Parmar, Senior Research Analyst at HDFC Securities.

Brent crude briefly traded above $90 a barrel on Monday after rising over 20% in the past two weeks. The global benchmark was at $90.26 in futures trade, up 2.45%, according to data. Prices eased after Iran’s foreign ministry indicated that negotiations with the United States could be pursued based on national interests.

However, geopolitical risks remained elevated. U.S. forces struck Iran for a ninth consecutive day on Monday, and concerns over oil supplies through the Strait of Hormuz persisted after Iran said two oil tankers had exploded and become immobilised. The Times of India reported that Iran fired missiles towards Jordan, raising the risk of the conflict spreading into neighbouring Israel, while Bahrain activated its missile warning sirens.

India, the world’s third-largest oil importer and consumer, is highly vulnerable to oil price swings. Crude comprises over two-thirds of the country’s import bill, and higher prices strain foreign exchange reserves.

The dollar index was little changed at 100.7, while Asian currencies traded mixed. Indian equity markets fell, with the Sensex declining 593.78 points, or 0.76%, and the Nifty 50 dropping 169.20 points, or 0.70%, according to The Times of India. Foreign institutional investors sold equities worth a net Rs 376.41 crore on Friday, exchange data showed.

The RBI has taken steps to shore up the currency. On June 5, policymakers unveiled measures to attract more foreign currency by easing rules for investments in domestic bonds and encouraging dollar deposits from non-resident Indians. The rupee strengthened to as much as 94.1413 in late June following the announcement but has since given up gains.

Data released by the RBI on Friday showed total inflows through the concessional swap scheme stood at $20.72 billion as of July 17, of which FCNR(B) deposit flows were $17.41 billion. Despite the mobilisation, the rupee remains near record lows.

“Despite mobilising around $20 billion, the rupee is still hovering near record lows. That suggests FCNR(B) inflows alone are unlikely to support the currency. With the RBI carrying a large short forward book, it has limited room to allow the rupee to appreciate as any dollar inflows are likely to be absorbed either to build reserves or reduce the forward book,” said Ritesh Bhansali, Vice President at Mecklai Financial Services.

Barclays Bank Plc strategists, including Mitul Kotecha, wrote in a note that “USD/INR continues to face upward pressure amid higher oil prices and increased importer USD buying.” They added that the RBI’s recent measures to encourage FCNR inflows “appear to be falling short of expectations, though we expect some acceleration in the next couple of months.” Barclays estimates FCNR-related inflows of $25 billion to $30 billion over the coming months under its base-case scenario, below market expectations of about $40 billion to $50 billion.

India’s foreign exchange reserves increased by $964 million to $675.157 billion in the week ended July 10, RBI data showed. In the previous week, reserves had risen by $7.26 billion.

Swap markets in India are pricing about 70 basis points of rate hikes by the RBI over the next 12 months, while markets are pricing about 36 basis points of increases by the Federal Reserve over the same period.