Rupee Opens Higher at ₹94.46 Against US Dollar, but Rising Oil Prices Remain a Concern

The Indian rupee started Friday's session on a firmer footing, opening 3 paise higher at ₹94.46 against the US dollar. Support for the domestic currency came from dollar sales by the Reserve Bank of India (RBI) and inflows generated through special measures introduced by the central bank. At the same time, rising crude oil prices continue to pose a risk to the rupee's recent gains. Based on the Reuters report cited in the source, the currency has received support from both central bank actions and improved inflow expectations.  

The rupee has been one of the stronger-performing currencies in Asia this week. According to the report, it has emerged as the region's second-best performing currency after the Korean won and has climbed to a two-month high despite a sharp rise in crude oil prices. This strength has coincided with increased RBI intervention in the foreign exchange market and stronger inflows stemming from special schemes announced by the central bank. The RBI further reinforced this sentiment on Thursday when it provided an update on the inflows generated through those measures. 

Global currency markets have also been influenced by developments in the United States. Higher crude oil prices have pushed up US Treasury yields and strengthened expectations that the US Federal Reserve could raise interest rates this month. However, those expectations have moderated in recent sessions. 

The Dollar Index is now trading below 99, which is the weakest reading in almost two weeks. This drop came after statements by Fed Governor Christopher Waller, suggesting that he would be in favor of not changing the interest rates, provided that the inflation eases. After such statements were made, market expectations of a rise in the Fed rates dropped to about 50% from above 60% a few days ago. 

An expert quoted in the source noted that a weaker dollar could provide additional support to the rupee alongside optimism surrounding FCNR-related inflows. However, the report also underlined that the currency's near-term direction remains closely linked to movements in crude oil prices. 

Oil continues to be viewed as the biggest threat to the rupee's recent recovery. Disputes regarding the Strait of Hormuz have erupted once again just one month into a lull, sending crude oil prices higher by pushing them over the mark of $95 per barrel. Crude oil prices have risen by over 7% within just a few days, and fears are mounting regarding its impact on key economies like India that import oil. 

As per the report, an increase in tensions can lead to the prices of crude oil going up to the range of $100-$104 per barrel, which in turn can increase the pressure on the external accounts of India as well as on its currency. 

During the April-June quarter, India reported a current account deficit of $4.2 billion, which translates into 0.5% of its GDP. In the corresponding quarter a year back, the current account deficit was reported to be $3.4 billion, which constituted 0.4% of GDP. During the same period, the merchandise trade deficit rose to $86.1 billion, compared to $68.9 billion. As per the expert quoted in the report, an increase in oil prices could lead to the widening of current account deficit in India as well as high dollar demand among oil importers. 

Another factor that could influence the rupee is the RBI's forward dollar position. The central bank's net short dollar forward position reached a record $136.77 billion at the end of July. Of this, around $22.9 billion is due to mature over the next three months. 

As these positions mature, they could create additional demand for dollars and limit excessive gains in the rupee. The report also noted that surplus rupee liquidity has climbed to a record ₹9.7 lakh crore. According to the expert cited, managing the RBI's forward book could help absorb part of this excess liquidity while simultaneously generating dollar demand. 

Amit Pabari, Managing Director, Research Team at CR Forex Advisors, said the FCNR-related inflow story has provided a strong boost to the rupee, although underlying risks remain. According to him, the ₹94 to ₹94.20 range remains a key support zone. He added that any adverse surprise, particularly from the oil market, could push USD/INR higher towards 95, 95.50 and eventually 96.