The Indian rupee ended nearly flat at 95.3250 per US dollar on Friday but declined 0.1% for the week as renewed hostilities in the Middle East made investors cautious about exposure to oil-sensitive currencies, according to The Economic Times. This represents a modest recovery from the weekly low of 95.52 reached earlier in the week, when the currency had slipped 4 paise to 95.52 against the US dollar in early trade on Thursday. The rupee's weekly decline reflects continued vulnerability to external pressures, with the currency having depreciated 4.8% against the US dollar since the Iran conflict escalated, making it one of the worst-performing Asian currencies during this period. Global stocks rose on the back of AI-related enthusiasm in Asia over the U.S. market debut of South Korean chip bellwether SK Hynix, while regional currencies gained with the Japanese yen lifted by news of plans to encourage pension funds to increase their holdings of domestic financial assets. Investors have brushed off the tensions for now but the fragility of the ceasefire has renewed caution on the outlook for energy prices and global inflation, as noted by ANZ.
Crude prices jumped earlier this week after U.S. President Donald Trump said that the interim agreement to end the war with Iran was "over", but have since cooled off to trade at $75.8 per barrel, as reported by The Economic Times. The latest developments show Brent crude prices surged more than 3% following President Trump's escalation of threats against Iran, with Brent crude oil price fast heading towards the $80 per barrel mark. Trump reportedly threatened to bomb Iran for a second day and reimpose the US naval blockade in retaliation for attacks on tankers transiting the Strait of Hormuz. The surge in oil prices has been driven by fresh concerns over tensions in the West Asia, with President Trump announcing an end to the ceasefire with Iran in response to Iranian attacks on commercial ships in the Strait of Hormuz and on American military sites in other Gulf nations. According to ING Bank, the licence revocation may not immediately alter oil market fundamentals, but it could worsen market sentiment by increasing concerns about a possible breakdown in the temporary US-Iran understanding. The US Energy Information Administration (EIA) has forecast Brent crude oil price to average $74 in the third quarter of 2026, which is $27 lower than last month's forecast, Bhansali from Finrex Treasury Advisors LLP noted. Elevated oil prices present a risk to net energy importers like India and a sustained rise can lead to both slower growth and higher inflation, as noted by The Economic Times. India imports almost 90% of its crude oil requirements, making any increase in crude oil prices have a direct impact on import bill, inflation, fiscal deficit and balance of payments.
Investor focus next week will be on consumer inflation prints in India and the U.S., with ANZ expecting India's retail inflation to rise to 4.3% year-on-year, in line with forecasts of economists polled by Reuters, according to The Economic Times. "We will also be monitoring whether recent input cost pressures begin to pass through to core inflation, signalling potential second-round effects," ANZ said. For the rupee, merchant dollar demand will be a key driver as analysts expect importers to hedge aggressively while exporters may stick to an opportunistic approach when locking in foreign exchange protections. The fragile truce in West Asia leaves energy markets vulnerable to renewed volatility and higher crude oil prices, as noted by ANZ. This renewed caution on the outlook for energy prices and global inflation has made investors more cautious about exposure to oil-sensitive currencies like the rupee.
The escalating Iran-US tensions have reinforced expectations that the US Federal Reserve (Fed) may keep interest rates higher for longer to combat stubborn inflation, as reported by Business Standard. Trump's threat to reimpose the US naval blockade in retaliation for attacks on tankers transiting the Strait of Hormuz has stoked concerns that a renewal of war could again drive inflation and push up interest rates. This could reinforce expectations that the Fed may maintain its hawkish stance, which could have implications for emerging market currencies like the rupee. The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading at 100.98, down 0.09%, while Brent crude, the global oil benchmark, was trading higher by 1% at USD 78.80 per barrel in futures trade. This positive sentiment in domestic equity markets helped support the Indian currency despite the broader geopolitical tensions weighing on the rupee.
