Mumbai: The Reserve Bank of India is believed to have stepped into the foreign exchange market to support the rupee as the currency continues to face pressure from high oil prices, strong demand for dollars and growing uncertainty in the Middle East.
The rupee was trading around Rs 95.38 against the US dollar on Friday morning after closing at Rs 95.44 on Thursday. The currency has remained within a very narrow range this week, moving between about Rs 95.17 and Rs 95.45. Market participants believe the central bank has been using state owned banks to sell dollars and prevent the rupee from weakening sharply.
The intervention comes at a time when the Indian currency is facing several challenges. Rising crude oil prices have become one of the biggest concerns because India depends heavily on imports to meet its energy needs. Any sustained increase in oil prices means Indian companies need more dollars to pay for imports. This creates additional demand for the US currency and puts pressure on the rupee.
The situation has become more difficult because of continuing tensions in the Middle East. Concerns over shipping through the Strait of Hormuz have increased following threats of further military action involving Iran. Any disruption to oil supplies or shipping routes could push global crude prices higher and increase India's import bill.
Oil prices have already remained elevated during the week. Brent crude was trading near 87 dollars a barrel and was on course for a weekly increase. Although oil prices eased at times, the uncertainty surrounding the Middle East has kept traders cautious.
The RBI has intervened frequently in recent weeks as the rupee has struggled to gain strength. The central bank's actions appear to be aimed at preventing sudden movements rather than defending a fixed exchange rate. By supplying dollars when demand rises sharply, the RBI can reduce volatility and discourage traders from aggressively betting against the rupee.
The effect of this intervention has been visible in the currency market. The rupee has stayed within a narrow trading range even though there has been strong demand for dollars from oil companies, importers and other businesses. Market volatility has also fallen significantly.
However, the pressure on the rupee has not disappeared. India's merchandise trade deficit widened to nearly 32 billion dollars in July, reaching its highest level in six months. Imports increased sharply, while higher global freight and energy costs added to the country's external payments burden.
Foreign investor outflows have also weighed on the currency. Investors have remained cautious because of geopolitical uncertainty and changing expectations about global interest rates. Demand for dollars linked to overseas debt payments and maturing financial contracts has added another layer of pressure.
The rupee's current level is therefore being closely watched by traders. The Rs 95 level is considered an important area for the currency, while a sustained move towards Rs 96 could increase concerns about another test of its recent record low.
For now, the RBI appears determined to prevent an abrupt decline. Softer oil prices could provide some relief if the trend continues, while an improvement in Middle East tensions could also reduce pressure on the currency.
The bigger risk is a prolonged period of expensive oil combined with continued foreign fund outflows and strong dollar demand. Such a situation could make it increasingly difficult for the central bank to keep the rupee within its current narrow range.
The coming days are likely to remain important for the Indian currency. Traders will closely monitor crude oil prices, developments involving Iran and the Strait of Hormuz, foreign investment flows and India's trade data. The RBI's response will also remain a major focus as markets assess how far the central bank is prepared to go to limit volatility in the rupee.