RBI Steps In As Rupee Slips Towards Record Low Amid Crude Oil Surge

The Reserve Bank of India sold U.S. dollars in both offshore and onshore markets to support the rupee, according to people familiar with the transactions. The currency fell as much as 0.2% to 96.4575 against the U.S. dollar, moving closer to its record low of 96.9650 recorded in late May.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

The intervention came as Brent crude prices crossed $90 a barrel on Monday. Rising oil prices have increased pressure on the rupee by raising concerns over India’s import bill and demand for dollars.

The benchmark 10-year government bond yield also moved higher by 4 basis points to 6.82%.

Brent Crude Price Rally Adds To Currency Pressure

Brent crude price has risen more than 20% over the past two weeks, with the latest gains coming amid renewed tensions between the U.S. and Iran. A series of retaliatory attacks has increased concerns over potential disruptions to oil supplies and shipping routes.

Crude oil accounts for more than two-thirds of India’s import bill, making a sustained rise in the crude oil price a key factor for the country’s external finances. Higher oil prices generally increase the demand for U.S. dollars from importers, adding to pressure on the rupee.

The rupee had earlier recovered to 94.1413 in late June after the RBI and policymakers introduced measures to attract foreign currency into India. The measures, announced on June 5, included easing certain rules for investments in domestic bonds and encouraging dollar deposits from non-resident Indians.

RBI Measures Yet To Fully Offset Dollar Demand

The recovery has since weakened as the sharp rise in the crude oil price renewed demand for the U.S. dollar. The government and the central bank have also been encouraging lenders to increase efforts to attract foreign currency deposits from overseas Indians.

Barclays has estimated that FCNR-related inflows could reach $25 billion to $30 billion over the coming months under its base-case scenario. The estimate is below market expectations of around $40 billion to $50 billion.

The bank has also said that the USD/INR pair continues to face upward pressure due to higher oil prices and increased dollar buying by importers. It added that the recent measures aimed at encouraging FCNR inflows had not yet generated the level of inflows expected by the market.

With Brent crude price remaining above $90 a barrel and the rupee trading close to its record low, currency movements are likely to remain closely linked to oil prices, dollar demand and foreign currency inflows in the near term.