Indian Rupee left shook as oil prices soar after Israel strikes on Iran
The RBI intervened by selling dollars, helping the rupee recover from a low of 86.20 to 86.05 against the US dollar after Israel launched strikes on Iran.
A surge in oil prices after Israel’s strikes on Iran sent the Indian rupee tumbling on Friday, prompting the central bank to step in and limit further losses, traders said.
The attack sparked a wave of risk aversion across markets. Asian currencies and equities dropped, U.S. equity futures fell, while safe havens rose. Brent crude surged by as much as 11% at one point.
In response, the rupee slipped to 86.20 per dollar, its weakest level in two months. The Reserve Bank of India (RBI) likely intervened to curb volatility and support the currency. A trader told Reuters the central bank likely sold U.S. dollars via state-run banks, stabilising the rupee around the 86.05 level.
The RBI typically leans against sharp moves in the spot market, especially those driven by external shocks, traders noted. The rupee was last quoted at 86.12.
"Price action was stretched at the open, and the RBI likely intervened in small size," said an fx dealer at a private bank. "Having said that, you can't expect this dip (in dollar/rupee) to hold for long looking at oil prices."
Higher oil prices are a significant negative for India, which imports about 80-85% of its crude requirements. A sustained rise in crude worsens the trade and current account deficits, and adds upward pressure on domestic inflation. Additionally, higher oil prices increases dollar demand from refiners.
"There is risk of this escalating, though earlier once Israel attacked Iran with the latter retaliating and both claiming success and denying major damage and the tensions faded," said Madhavi Arora, chief economist at Emkay Global Financial Services.
"However in this case, more details are awaited and in the near term oil would be highly volatile."
Meanwhile, forward premiums rose across tenors, reflecting the potential impact of higher oil prices on Indian interest rates. The 1-year USD/INR annualised premium rose 6 basis points to 1.92%.
