Mumbai: The Indian rupee came under fresh pressure on Monday as higher oil prices and growing expectations of a US Federal Reserve rate increase weighed on the currency. Indian government bonds also remained under pressure as investors assessed the outlook for growth and interest rates.
The rupee opened at 95.56 against the US dollar, down 13 paise from Friday's close. It briefly weakened to around 95.60 before recovering some ground as the Reserve Bank of India intervened in the foreign exchange market.
The latest pressure comes as global markets react to renewed tensions involving the United States and Iran. US forces struck two rocket launchers on Iran's Larak Island near the Strait of Hormuz. Iranian media also reported that Iran had attacked two US air bases in Jordan.
The developments have raised fresh concerns about oil supplies and shipping through the Strait of Hormuz, an important route for global energy trade. Brent crude rose above 90 dollars a barrel on Monday as markets priced in a higher risk of disruption to supplies.
Higher oil prices are a particular concern for India because the country imports most of its crude oil requirements. More expensive oil can increase India's import bill and demand for dollars, putting additional pressure on the rupee. It can also add to inflation and make it more difficult for the central bank to consider further interest rate cuts.
The other major pressure on the rupee is the changing outlook for US interest rates.
Federal Reserve Chair Kevin Warsh said on August 28 that the US central bank may need to raise interest rates if inflation remains above its target. His comments increased market expectations of a possible rate increase at the Federal Reserve's September 15 and 16 meeting.
However, the Federal Reserve has not announced a decision to raise rates in September. The outcome will depend on incoming economic data, including employment and inflation figures.
A higher US interest rate outlook can strengthen the dollar and reduce the relative attractiveness of emerging market assets such as Indian bonds and the rupee.
Indian government bonds are also facing pressure. The yield on India's benchmark 10 year government bond ended at 6.9108 percent on Friday, its highest level in more than two months. Bond prices and yields move in opposite directions, so a rise in the yield indicates increased selling pressure.
Investors are also watching India's latest economic growth figures. The Ministry of Statistics and Programme Implementation is scheduled to release data for the April to June quarter later on Monday.
Economists polled expect the economy to have grown by 7.1 percent during the quarter, compared with 7.8 percent in the January to March period. The forecast is based on a survey of 58 economists, with estimates ranging from 6.2 percent to 8 percent.
The actual figure is important for financial markets because stronger than expected growth could reduce expectations of further monetary easing by the Reserve Bank of India, particularly if inflation risks also increase.
India's consumer inflation was 4.45 percent in July, according to provisional government data. This remains within the Reserve Bank's inflation tolerance band of 2 percent to 6 percent, although it is above the central bank's 4 percent target.
The Reserve Bank kept its policy rate at 5.25 percent at its latest meeting and maintained a neutral policy position. Recent policy discussions have nevertheless highlighted the possibility of future rate increases if inflation pressures become broader and more persistent.
For now, Reserve Bank intervention has helped limit the rupee's decline despite the difficult international environment. The central bank has also taken steps in the currency market to manage short term dollar liquidity.
The rupee is therefore facing several competing pressures. Higher oil prices can increase India's demand for dollars, while a stronger US rate outlook can support the dollar and put pressure on emerging market currencies. At the same time, Reserve Bank intervention is helping contain sharp movements in the rupee.
Markets will now focus on India's growth data, developments around the Strait of Hormuz and upcoming US economic figures for further clues about the direction of the rupee, interest rates and Indian bond yields.