Mumbai: The Indian rupee fell past 95 against the US dollar on Wednesday as rising crude oil prices and growing tensions in the Middle East increased pressure on the currency, despite continued efforts by the Reserve Bank of India to limit sharp movements in the foreign exchange market.
The rupee fell to a session low of 95.2250 per dollar before recovering to around 95.07. Traders said the recovery was likely linked to intervention by the Reserve Bank of India.
The move came after the rupee had strengthened in recent weeks as the RBI intervened repeatedly in the foreign exchange market. Traders said the central bank had been selling dollars to support the rupee and limit sharp movements in the currency.
The latest pressure has come as oil prices have moved close to $100 a barrel. Brent crude, the international benchmark, was trading near that level on Wednesday as markets reacted to rising tensions in the Middle East.
The situation has raised concerns about possible disruption to oil supplies. Tensions involving the United States and Iran, along with attacks by Houthi forces in Yemen, have added to uncertainty in energy markets.
For India, higher oil prices are particularly important because the country relies heavily on imported crude oil. Official Indian energy statistics show that crude oil import dependence has remained above 85 percent in recent years and was close to 89 percent in the latest available figures.
When crude oil becomes more expensive, Indian companies need more dollars to pay for imports. This can increase demand for the US currency and put pressure on the rupee.
A weaker rupee can also make imported oil more expensive in Indian currency. If high oil prices continue, the combination of a weaker rupee and more expensive crude could increase pressure on India's import bill and inflation.
The RBI has a large foreign exchange reserve to help manage periods of pressure in the currency market. India's foreign exchange reserves reached a record $740.80 billion in the week ending August 28.
The reserves give the central bank a substantial buffer as it responds to pressure in the currency market. However, they cannot remove the underlying pressure created by a sustained rise in oil prices and strong demand for dollars.
The rupee had moved towards 94.30 last week as the RBI intervened repeatedly in the market, according to traders. The currency then came under renewed pressure as Brent crude moved closer to $100.
The break above 95 also triggered stop loss selling by some traders, adding to the downward movement during Wednesday's session.
Market participants said the RBI was active in the currency market on Tuesday and Wednesday. However, traders said the central bank's presence appeared less forceful as demand for dollars increased.
The rupee was the worst performing Asian currency during Wednesday's trading, according to Reuters, reflecting the pressure created by higher oil prices and the currency's recent strong recovery.
The rupee is also being influenced by wider global financial conditions. Expectations about US interest rates can affect the strength of the dollar and the movement of international funds into emerging markets such as India.
The immediate focus for the Indian currency is likely to remain on oil prices and developments in the Middle East. A prolonged period of high crude prices could increase India's import costs and make it more difficult for the rupee to recover.
At the same time, India's large foreign exchange reserves provide the RBI with a substantial buffer as it responds to market pressure.
The key issue for the rupee is now whether the rise in oil prices remains temporary or develops into a longer period of pressure. The response of the RBI and developments in global energy markets will be closely watched in the days ahead.