The Indian rupee has recovered from recent highs, trading below 96 against the dollar as oil prices retreat from the $100+ levels reached last week. According to The Times of India, the currency's recent movements have closely reflected changes in crude oil prices, with the USD/INR pair expected to trade between 94.80 and 95.25 during the current quarter. As per Kotak Securities' Anindya Banerjee, the recent rally in crude prices was driven more by supply route concerns than by any shortage of oil, with global supply remaining ample. Banerjee expects that if Brent crude remains below $105 per barrel, the USD/INR pair is unlikely to rise beyond 97.50, with potential for the rupee to strengthen towards 94.00 as foreign capital inflows improve.
Indian government bonds declined for the fourth consecutive session as oil prices surpassed $100 per barrel and the 10-year U.S. Treasury yield hit an 18-month high of 4.70%, pushing up overnight swap rates. The benchmark 6.94% 2036 bond yield traded at 6.8571% as of 10:30 a.m. IST, after closing at 6.8413% on Thursday and hitting its highest level in five weeks during early trading. As per a trader with a primary dealership, "Supply disruptions from the main route, tanker rerouting, higher insurance premiums and longer voyage times will further tighten crude availability, pushing up the prices, even if production remains unchanged." The one-year swap rate was at 6.05%, while the two-year rate was at 6.25%, with the most liquid five-year rate jumping to 6.57%.
Brent crude settled above $100 per barrel for the first time since May after Yemen's Houthis targeted two Saudi oil tankers in the Red Sea, marking a significant escalation in Middle East tensions. The jump in crude prices has rekindled concerns that inflation could prove more persistent than previously expected for both India and the United States. Oil prices extended their rise as the United States launched a new round of strikes on Iran, marking its 12th consecutive night of attacks. However, Kotak Securities' Anindya Banerjee noted that the price surge is almost entirely driven by concerns around maritime supply bottlenecks, specifically the Strait of Hormuz, and once the Strait opens fully, prices should drop and settle between $60 and $70 per barrel. The rising attacks could further disrupt energy supplies, threatening to deepen the shortfall in global markets triggered by the closure of the Strait of Hormuz.
India's vulnerability to sustained oil prices above $100 is particularly acute, with the country importing 85-90% of its crude requirement. According to Manoranjan Sharma, Chief Economist at Infomerics Valuation and Rating Limited, including freight and war-risk premia, India's effective cost could reach $115 per barrel. As reported by Reuters, elevated oil prices present key risks for India as they threaten to lift inflation, slow growth and widen the current account deficit. Every $10 per barrel increase could add nearly $20 billion to the current account deficit and reduce growth by 15-50 basis points. HDFC Securities' Devarsh Vakil noted that higher crude oil prices could put pressure on India's external balances by widening the current account deficit and adding to inflation, though he expects the RBI to focus on preventing excessive volatility rather than defending any particular exchange rate level.
New Delhi will raise ₹280 billion ($2.90 billion) through a bond auction later today, including ₹170 billion of a new 15-year paper, with the yield on this note surging 5 basis points in the when-issued segment, trading at 7.05% on Friday. The rupee's stability comes despite broader market pressures, with India's benchmark stock index Nifty 50 falling 0.5%, declining for the fourth consecutive session. Government bonds were also under pressure, with the yield on the benchmark 10-year note fleetingly touching a one-month peak. Short positions on the Indian rupee have risen to an over one-month peak, reflecting increased bearish sentiment. Analysts at BofA Global Research noted that geopolitical tensions and oil price spikes have led to a recent unwinding of long INR positions, with the rupee remaining exposed to swings in oil prices and risk sentiment.
