Mumbai: The Indian rupee weakened further against the US dollar on Thursday as crude oil prices remained above $100 a barrel, increasing pressure on India's import bill and raising concerns about inflation and economic growth.
The rupee fell about 0.2% to 95.30 against the dollar, its weakest level in about 10 days. It had closed at 95.1050 on Wednesday after coming under pressure from rising oil prices and demand for dollars.
The latest decline came as Brent crude remained above $100 a barrel following a fresh escalation in the conflict between the United States and Iran. Attacks on shipping near the Strait of Hormuz have increased fears of further disruption to global oil supplies.
Brent crude settled at $101.21 a barrel on Wednesday after rising above $100 for the first time since July. The increase in oil prices has raised concerns for India, which is one of the world's largest oil importers.
Traders said state run banks were seen offering dollars around 95.30 to 95.35, in what they believed was intervention by the Reserve Bank of India. Similar dollar selling by state run banks was reported during several trading sessions last week.
The intervention appears to have helped limit the speed of the rupee's decline. However, traders said the intensity of the central bank's support appeared to have reduced over the past two or three sessions. The RBI has not publicly announced a target level for the rupee or confirmed the size of its recent intervention.
The currency is also facing pressure from other sources. Companies making overseas debt repayments need dollars, while Indian importers are increasing their hedging activity against further currency movements.
The rupee's weakness is closely linked to the rise in crude prices because India depends heavily on imported oil. Higher crude prices mean Indian companies and refiners need more dollars to pay for imports. This can increase demand for dollars and put further pressure on the rupee.
The impact can extend beyond the currency market. More expensive oil can increase transportation and production costs and add to inflationary pressure. It can also increase India's overall import bill and affect corporate profits and economic growth if high prices continue for a long period.
Indian financial markets have also reacted to the oil shock. The Sensex fell more than 813 points and the Nifty dropped about 204 points on Wednesday as Brent crude moved above $100. Both indexes closed at three month lows. They had fallen in seven of the previous eight sessions, losing about 3.1% each during that period.
Indian shares remained largely subdued in early trading on Thursday as investors continued to assess the impact of higher oil prices and the wider geopolitical situation.
Domestic petrol and diesel prices in major Indian cities have remained broadly stable despite the recent rise in international crude prices. The latest increase in international oil prices should therefore not yet be described as a nationwide fuel price increase.
However, a prolonged period of high crude prices could create greater pressure on domestic fuel prices and inflation.
India's foreign exchange reserves provide the RBI with a substantial buffer as it manages periods of market stress. Large reserves give the central bank room to intervene, but they cannot remove the underlying economic pressure created by a sustained rise in oil prices.
The immediate outlook for the rupee will depend heavily on oil prices and developments in the US Iran conflict. A further escalation could keep crude prices high and increase pressure on the Indian currency. A reduction in tensions and a recovery in oil supplies could ease some of that pressure.
For now, the rupee remains above the 95 per dollar level despite signs of likely central bank intervention. The latest movement shows how quickly higher energy prices and geopolitical risks can affect India's currency, financial markets and inflation outlook.