The Indian rupee closed at 96.28 per dollar on Friday, marking its sharpest weekly drop since May, with the currency declining about 1% week-on-week, as reported by The Hindu BusinessLine. The rupee experienced its steepest weekly drop in nine weeks, with Friday's uneventful trading session closing out the week, as elevated oil prices and strong merchant dollar demand renewed worries about the currency's trajectory. Dollar sales by state-run banks, most likely on behalf of the Reserve Bank of India, helped the rupee snap a four-day losing streak even as merchant dollar demand remains robust, according to traders. The currency's recovery from Thursday's 17 paise decline to 96.42 was supported by interventions from state-run banks, temporarily halting its downward trend despite continued pressures. Market participants are closely monitoring oil prices and the Reserve Bank of India's approach to the rupee's depreciation as the currency approaches record low levels near 97 per dollar.
Iran said it launched fresh strikes on U.S. facilities in the Middle East on Friday, including the first direct attack in Syria, after a sixth straight night of U.S. strikes on Iranian military facilities, as reported by The Hindu BusinessLine. The escalation comes as Brent crude oil prices were last up nearly 2% on the day at $85.7 per barrel, with fighting between the U.S. and Iran intensifying and choking energy supplies through the Strait of Hormuz. The rupee's weakness was primarily driven by the 13% rise in Brent crude oil prices as the U.S.-Iran conflict intensified, with traders noting that exporters have once again withdrawn from the market anticipating further weakness. "Exporters have once again withdrawn from the market anticipating further weakness. Importers are not inclined to let any dip (on USD/INR) go," said an FX salesperson at a foreign bank. The continued geopolitical uncertainties in West Asia sustained demand for safe-haven assets and kept investors cautious towards emerging-market currencies, including the rupee.
According to CME FedWatch data, the probability of a 25-basis-point Fed rate hike in July fell to 16.6% from 41.7% a day earlier, while expectations for a September rate hike also eased, with the probability declining to 59.8% from 75.1%, as reported by CNBC TV18. Citi Research said the softer June inflation reading, along with moderating core inflation and weaker jobs data, suggests a July rate hike is unlikely. Englander noted that "the fact that CPI, and the components of PPI that feed into Personal Consumption Expenditures (PCE), are coming in on the soft side is more important for the Fed's rate outlook. Historically, the US economy has absorbed energy price shocks through weaker demand rather than through persistently higher inflation." Fed Chair Kevin Warsh reiterated the central bank's commitment to restoring price stability during congressional testimony on Tuesday, providing additional support for the dollar pullback. Interest rate swap markets are pricing in about a 40-basis-point Fed rate hike over the next 12 months and 65 bps by the Reserve Bank of India, with both central banks expected to hold rates steady at their upcoming meetings in late July and early August.
The Reserve Bank of India (RBI) has been intervening in both the spot and non-deliverable forward markets to reduce excessive volatility in the currency, as reported by CNBC TV18. Market participants said the RBI's intervention has been relatively measured given the intensity of pressure on the rupee. Traders said the central bank has not appeared to defend a particular exchange-rate level aggressively but has focused on ensuring orderly movement in the currency. The rupee is now less than 0.5% away from its record low of 96.96 per dollar, touched in May, highlighting the currency's vulnerability to continued pressures. The central bank's net forward dollar liabilities stood at $106.6 billion in May, adding complexity to its intervention strategy. "Should rupee depreciation pressures persist, the RBI may find itself caught between a rock and a hard place, balancing spot-market operations and managing its forward-dollar book," said Krishna Bhimavarapu, APAC economist at State Street Investment Management.
Foreign Institutional Investors offloaded equities worth ₹4,205.56 crore on a net basis on Thursday, according to exchange data, as reported by The Economic Times. Despite the rupee's recovery from Thursday's 17 paise decline to 96.42, heavy FII outflows and higher global crude oil prices amid heightened tensions in West Asia prevented further gains in the local unit. The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading marginally up by 0.02% at 100.78. In global markets, MSCI's broadest index of Asia-Pacific shares, excluding Japan, was down nearly 3% on Friday, while India's Nifty 50 rose 1%, with Indian stocks holding their ground on account of their scant exposure to the booming artificial intelligence sector. Another brutal selloff for chipmakers rippled through global stock markets on Friday, highlighting the broader market volatility amid geopolitical tensions.
