Mumbai: India's rupee remained under pressure from rising oil prices on Friday. At the same time, the Reserve Bank of India was seen selling US dollars to support the currency as renewed tensions between the United States and Iran raised concerns about disruptions to oil supplies.
The rupee opened at 94.46 against the US dollar on Friday, compared with 94.4850 at Thursday's close. Market traders said the RBI was seen selling dollars near the start of trading, helping to limit pressure on the currency.
The central bank has not disclosed how many dollars it sold during the latest intervention. The reported dollar sales are based on observations by market participants rather than an announcement from the RBI.
Oil prices have risen as tensions between the United States and Iran have increased concerns about supplies from the Middle East. Brent crude was trading above $95 a barrel on Friday.
Higher oil prices are an important concern for India because the country depends heavily on imported crude oil. An increase in the cost of imported oil raises demand for US dollars and can put additional pressure on the rupee.
Despite the oil price increase, the rupee has recently strengthened. It reached a two month high earlier in the week and had gained more than 1 percent during the week by Thursday.
The recent strength has been supported by large foreign currency inflows and continued action by the RBI in the foreign exchange market.
India has attracted about $136.38 billion through special foreign currency measures introduced by the central bank. The total includes $127.23 billion in deposits from non resident Indians, $3.89 billion through external commercial borrowings and $5.26 billion through overseas foreign currency borrowings.
The measures were introduced to increase foreign currency inflows and strengthen India's external financial position. The large inflows have given the RBI greater room to respond to pressure on the rupee.
India's foreign exchange reserves stood at a record $729.33 billion as of August 21, according to central bank data.
However, the large inflows have also created a substantial surplus of rupee liquidity in the banking system. The surplus was estimated at about 9.7 trillion rupees, equivalent to more than $100 billion.
The RBI now faces the task of managing this excess liquidity while continuing to maintain orderly conditions in the foreign exchange market.
Indian banks have discussed several possible measures to absorb the surplus. These include foreign exchange sell and buy swaps, reverse repo operations, government bond sales and possible changes to the cash reserve ratio.
These measures remain options under discussion and should not be treated as confirmed RBI policy.
The recent rise in the rupee has therefore come at a complicated time for India's economy. Large foreign currency inflows have strengthened the country's ability to manage external pressure, but higher oil prices could increase import costs and create renewed demand for dollars.
A prolonged rise in crude prices could also increase inflationary pressure in India. The effect would depend on the duration of the oil price increase, movements in the rupee and how the central bank responds.
The latest reported intervention is part of a wider pattern. The RBI has been reported to have sold dollars several times in recent weeks as it sought to prevent sharp movements in the rupee.
The central bank's foreign exchange position is now stronger than it was before the recent inflows. At the same time, the large inflows have created additional challenges for monetary and liquidity management.
The outlook for the rupee will depend partly on oil prices and developments involving the United States and Iran. Financial markets will also watch the US dollar and expectations for US interest rates, which can influence capital flows into emerging markets.
For now, the rupee is benefiting from unusually large foreign currency inflows and active central bank support, while higher oil prices remain a significant risk. The RBI's latest reported dollar selling shows that authorities are continuing to manage pressure on the currency as global energy and geopolitical risks remain elevated.