Rupee Gains as RBI Support Offsets Rising Oil Costs

Key Moments

Rupee Opens Firmer on Suspected RBI Support

The Indian Rupee (INR) started Thursday’s session slightly stronger against the US Dollar (USD), with market participants pointing to possible Reserve Bank of India (RBI) action in both the spot and non-deliverable forwards (NDFs) markets. The USD/INR pair slipped toward 96.47, pulling back from the two-month peak of 96.75 reached on Monday but still trading close to that high.

A Reuters report said the RBI likely intervened in the foreign exchange market on Thursday in an effort to contain rupee weakness, as a sustained rise in oil prices intensified the currency’s slide toward its record lows. The RBI has been perceived as stepping in multiple times in recent weeks, as the rupee has lagged other Asian currencies under the weight of higher crude prices and ongoing foreign portfolio outflows from Indian equities.

Oil Rally Limits Rupee Upside

The modest rebound in the rupee on Thursday was seen as vulnerable, with escalating energy supply risks in the Middle East driving further gains in oil prices. In early trade, the MCX Crude Oil futures contract expiring on August 19 traded 1.75% higher around Rs. 8,570, marking its highest level in more than six weeks.

Currencies of oil-import-dependent economies such as India tend to fare poorly when crude prices climb, as higher import costs weigh on the balance of payments and increase demand for USD. Earlier in the day, The Guardian reported that Yemen’s Iran-aligned Houthis launched missile and drone attacks on two Saudi oil tankers in the Red Sea on Wednesday – identifying one as the Encelia – as part of a maritime blockade on the kingdom amid the US-Iran war.

Strategists See Oil Shock Favoring High-Carry Commodity FX

Analysts at BNY Mellon characterized the latest move in crude as a significant currency event without constituting a systemic crisis across Asia. They argued that “oil at $95 is an FX shock, but not a broad Asia balance-of-payments crisis,” highlighting “stronger current-account buffers” in ASEAN and India as well as “lighter positioning” that could help cushion the blow.

They noted that the “cleaner opportunity is in high-carry commodity FX such as BRL, CLP and ZAR,” where stronger energy prices can support currencies offering higher yields. The strategists also said NOK may see some “oil-linked demand,” while warning that “elevated holdings and limited Norges Bank buying cap the upside,” which could limit the extent of any rally in the Krone.

Foreign Investors Continue to Pare Indian Equity Exposure

Foreign Institutional Investors (FIIs) maintained a cautious stance toward Indian equities against the backdrop of rising energy costs. On Wednesday, FIIs were net sellers, reducing holdings worth Rs. 819.20 crore.

Cumulatively for the month to date, foreign investors have been net sellers, trimming their exposure by Rs. 4836.95 crore.

USD/INR Technical Picture: Bias Remains Upward Near Record Highs

In the opening session, USD/INR traded slightly lower around 96.53 but continued to exhibit a constructive near-term tone while staying above the 20-period exponential moving average (EMA) at 95.8764.

The Relative Strength Index (RSI) stood at 64.10, remaining in positive territory but shy of overbought conditions. This configuration pointed to sustained upward momentum without clear signs of an imminent reversal.

On the downside, immediate support was identified at the 20-period EMA near 95.88, which underpins the prevailing bullish structure as long as it holds. On the topside, the all-time high around 97.10 was flagged as the crucial resistance zone for the pair.

Indian Economy and INR: Key Macro Drivers

Growth and Capital Flows

The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, positioning it among the world’s faster-growing economies. This pace of expansion has attracted substantial foreign capital, including Foreign Direct Investment (FDI) into on-the-ground projects and Foreign Indirect Investment (FII) into domestic financial markets. Higher foreign participation tends to lift demand for the Indian Rupee. At the same time, shifts in USD demand from Indian importers also play a role in INR dynamics.

Oil Prices and the Rupee

India relies heavily on imported oil and gasoline, which makes the rupee sensitive to crude price movements. With most global oil trade denominated in USD, a rise in oil prices increases aggregate USD demand. Indian importers must sell more rupees to secure the required dollars, a process that typically exerts depreciation pressure on INR.

Inflation, Interest Rates, and Currency Impact

Inflation in India has a multifaceted influence on the rupee. In broad terms, higher inflation implies an expanding money supply, which can erode the currency’s value. However, when inflation moves above the Reserve Bank of India’s 4% target, the central bank responds by lifting interest rates to damp credit growth. Higher interest rates – particularly higher real interest rates, defined as the gap between nominal rates and inflation – can bolster the rupee by making Indian assets more appealing to international investors. A decline in inflation can also support INR, although the accompanying potential for lower rates may have a weakening effect.

Seasonal USD Demand and Trade Dynamics

India has historically operated with a trade deficit, meaning imports regularly exceed exports. Because global commerce largely settles in USD, periods of elevated import activity – driven by seasonal factors or large order flows – can trigger spikes in USD demand. During such episodes, the rupee may come under pressure as it is sold to obtain dollars. Periods of heightened market volatility can similarly lift demand for USD, with negative implications for the rupee’s value.