Rupee Faces Pressure As Oil Rebounds, Month-End Dollar Demand Rises

The Indian rupee is expected to face renewed pressure on Tuesday after crude oil prices climbed following fresh U.S. military action in Iran, reducing optimism around an immediate peace agreement in West Asia.

The rupee is likely to open in the 95.25-95.30 range against the U.S. dollar after closing at 95.23 in the previous session. The domestic currency had recovered over the last three trading sessions after touching a record low of 96.96 last week.

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Brent crude futures rose more than 2% to around $98.3 per barrel after U.S. forces carried out strikes in southern Iran on Monday. The increase in oil prices comes after crude had earlier dropped to its lowest level in more than two weeks amid hopes of easing tensions in the Gulf region.

Higher crude oil prices remain a concern for India, which imports a large share of its energy requirements. Rising oil prices typically increase demand for dollars from importers and put pressure on the rupee.

RBI Intervention, Dollar Demand In Focus

Besides crude prices, the demand for dollars at the end of the month arising out of imports and maturity of non-deliverable forward contracts is another factor being watched by traders. This factor will be responsible for an increased demand for dollars this week.

The Reserve Bank of India (RBI) has recently stepped up interventions in the foreign exchange market through dollar sales to limit volatility in the rupee. RBI Governor Sanjay Malhotra said the central bank would take necessary steps to ensure orderly movements in the forex market.

He also stated that the RBI does not target any fixed exchange rate level but remains prepared to act against excessive speculative pressure. The RBI currently holds foreign exchange reserves of nearly $700 billion.

Meanwhile, Indian banks have reportedly sought lower hedging costs from the RBI to support overseas borrowings and improve foreign currency inflows into the economy.

Domestic fuel prices also remain in focus after state-run oil marketing companies raised petrol and diesel prices for the fourth time in May. India also increased compressed natural gas prices on Tuesday.

Following the fuel price revisions, Goldman Sachs raised its inflation forecast for FY27 by 10 basis points to 5.2%. The brokerage now expects the RBI to raise interest rates twice by 25 basis points each in October and December.

In global markets, the dollar index was trading near 99.05, while the yield on the 10-year U.S. Treasury note stood at 4.51%.

According to NSDL data, foreign portfolio investors sold Indian equities worth $548.1 million on May 22. Foreign investors, however, purchased Indian bonds worth $31.6 million during the same period.