New Delhi: The Indian rupee came under renewed pressure on Friday as rising oil prices and higher US bond yields weighed on the currency, while currency traders said the Reserve Bank of India was likely intervening to limit the fall.
The rupee fell as much as 0.4 percent to 95.7925 against the US dollar before recovering slightly to around 95.71. It had closed at 95.44 on Thursday after losing ground for three straight sessions.
Traders said state run banks were seen selling dollars in the market, which they believed was being done on behalf of the RBI. The central bank has not publicly confirmed the specific intervention reported on Friday.
The latest pressure comes as international oil prices have risen sharply because of growing concerns about energy supplies and shipping in the Middle East. Brent crude rose above $108 a barrel and approached $110 in Asian trading on Friday.
The rise in oil prices is particularly important for India because the country depends heavily on imported crude oil. When oil becomes more expensive, Indian importers need more dollars to pay for their purchases. This can increase demand for the US currency and put additional pressure on the rupee.
The recent oil surge has also reversed some of the rupee's gains from last week. The currency had reached a two month high of about 94.30 against the dollar after RBI intervention and large foreign currency inflows gave the central bank greater room to support the rupee.
The rupee has since weakened by about 1 percent over three trading sessions. The latest decline shows the difficulty of maintaining those gains while international oil prices remain high.
The RBI has also been using foreign exchange swaps to manage liquidity in the banking system. Traders said the central bank was likely conducting dollar rupee sell and buy swaps for a third consecutive session on Friday.
These operations are different from direct intervention in the currency market. The swaps are mainly used to absorb excess rupee liquidity from the banking system, but they can also provide some indirect support to the rupee.
The central bank has been dealing with a large increase in foreign currency inflows this year. The RBI said its special foreign exchange swap facility had attracted more than $136 billion in inflows by August 31. Most of the inflows came through foreign currency non resident bank deposits.
The RBI had used the strong dollar inflows to support the rupee during the previous week. Bankers estimated that the central bank had sold at least $8 billion in the foreign exchange market during that period.
However, the latest rise in oil prices has increased pressure on the rupee.
US Treasury yields have also risen following stronger US inflation data, increasing expectations that the US Federal Reserve could raise interest rates next week.
The 10 year US Treasury yield moved close to 5 percent on Friday. Higher US yields can make dollar assets more attractive and place additional pressure on currencies in emerging markets.
Foreign portfolio outflows have also added to pressure on the Indian currency, with Indian market reports linking the selling to high crude prices and wider market concerns.
The wider oil shock is linked to the continuing conflict and disruption affecting important shipping routes in the Middle East. Oil flows through the Strait of Hormuz remain restricted, adding to concerns about global energy supplies.
For India, a prolonged period of expensive oil could increase the country's import bill and create wider economic pressure. It could also add to inflation risks and affect growth if high energy costs persist.
For now, the RBI is managing excess liquidity in the banking system while market participants see its dollar sales as an effort to limit sharp movements in the rupee. But the latest fall shows that the currency remains under pressure as oil prices rise.
The rupee is likely to remain sensitive to oil prices, global dollar demand, foreign investment flows and developments in the Middle East.