The rupee’s modest weekly decline masks deeper pressure from importer dollar demand and derivative maturities, with persistent RBI intervention cushioning the fall. A pullback in crude prices could offer some relief, but geopolitical risks around the Strait of Hormuz may limit the currency’s upside.
The Indian rupee is likely to open marginally stronger on Friday as a retreat in global oil prices offers some relief to a currency that has faced persistent pressure through the week.
The rupee closed at 95.44 per US dollar on Thursday and is expected to open around 95.38-95.40, according to traders.
The local currency’s roughly 0.2 per cent weekly decline, however, masks the extent of the pressure underneath, bankers said.
The Reserve Bank of India’s near-daily intervention across multiple levels has absorbed a significant part of the dollar demand, cushioning the rupee and keeping its movements relatively contained.
Without the RBI’s intervention, the rupee’s losses would have been considerably larger, bankers said, pointing to maturities in the non-deliverable forward market and strong dollar demand from importers as key sources of pressure.
RBI intervention keeps rupee weakness in check
The central bank has been actively intervening in the foreign exchange market as persistent demand for dollars puts pressure on the rupee.
The intervention has helped prevent sharper moves in the currency even as underlying demand for dollars remains strong.
For the RBI, the objective is not necessarily to defend a particular rupee level but to smooth excessive volatility and prevent disorderly moves in the currency market.
That has become increasingly important as the rupee faces pressure from both domestic and global factors.
More from BusinessDollar demand from importers, along with maturities in the non-deliverable forward market, has added to the pressure. At the same time, uncertainty over oil prices and geopolitical tensions has complicated the outlook for the currency.
The result is a rupee that appears relatively stable on the surface but remains under considerable pressure underneath.
Softer oil offers some relief
The latest decline in crude oil prices could provide the rupee with some breathing room. Brent crude fell more than 2 per cent on Thursday and slipped further in Asian trading to around $86.50 a barrel.
For India, oil prices are particularly important because the country depends heavily on imports to meet its crude requirements. Higher oil prices increase the country’s import bill and, in turn, the demand for dollars from Indian oil companies and other importers. A sustained decline in crude prices can have the opposite effect.
Lower oil prices can reduce the dollar requirement for energy imports, ease pressure on India’s trade balance and provide some support to the rupee.
That makes the recent pullback in Brent an important positive factor for the currency, particularly at a time when the RBI is already working to contain depreciation pressure.
Geopolitics could limit the benefit
The relief from cheaper oil, however, may not translate into a sustained rupee recovery. Oil prices remain sensitive to developments around the Strait of Hormuz, one of the world’s most important energy shipping routes.
The United States has threatened to maintain a naval blockade of Iranian ports indefinitely, while Iran continues to restrict traffic through the strait.
The geopolitical uncertainty has kept a floor under crude prices. ING Bank said uncertainty surrounding the Strait of Hormuz could continue to underpin oil prices, even as markets assess the possibility of a broader agreement. That creates a key risk for the rupee.
If geopolitical tensions trigger another rise in crude prices, India’s import bill could come under renewed pressure, increasing dollar demand and making the RBI’s task more difficult.
Why the rupee may not gain much even with cheaper oil
For now, traders expect softer oil and a broadly supportive global risk environment to help the rupee at the open. But the gains could be limited.
A currency trader at a private-sector bank said the RBI has effectively “propped up” the rupee through persistent intervention. As a result, even a decline in oil prices may not leave the currency with much room to strengthen significantly.
This highlights the central tension in the rupee’s current trajectory. The RBI is cushioning the downside, while softer oil could reduce some of the underlying pressure. But neither factor, on its own, is enough to guarantee a sustained recovery.
For the rupee to strengthen meaningfully, traders would likely need to see a combination of lower crude prices, easing geopolitical risks and a moderation in underlying dollar demand.
Until then, the RBI remains the currency’s primary line of defence, while crude prices could provide a secondary source of relief if the recent decline proves durable.
The rupee’s relatively small weekly fall therefore tells only part of the story. Beneath the surface, persistent dollar demand continues to test the currency, with RBI intervention masking much of the underlying weakness.
