Rupee pinned just shy of 96/USD as RBI intervention counters oil woes

The Indian rupee slipped on Monday as oil prices climbed after diplomatic talks between the US and Iran appeared to hit an impasse, sending US bond yields higher and likely drawing the central bank into defending the Asian currency.

The rupee declined 0.1% to 95.95 per dollar, averting a fall past the 96 handle on the back of central bank intervention, similar to the market action over recent sessions.

Brent rose 2.5% to $107 per barrel after US President Donald Trump rejected a peace deal from Iran to resolve their conflict and reopen the Strait of Hormuz, keeping tensions in the Middle East elevated. This has lifted global bond yields as investors wager that central banks would need to raise borrowing costs to combat inflation.


Higher rates exert pressure on risk assets like emerging market currencies and equities. India's benchmark stock index, the Nifty 50, fell more than 1% on Monday, tracking losses in regional stocks while the 10-year government bond yield rose about 5 basis points to 7.16%.

India imports nearly 90% of its crude requirements, making it one of the world's most vulnerable economies to the Middle East oil shock.

The Reserve Bank of India's interventions have kept rupee volatility expectations subdued despite persistent headwinds. The rupee's 1-month implied volatility was at 4.2%, below its year-to-date average of 5%.

"We believe RBI is willing to spend incremental reserves to prevent INR weakness beyond 96/USD level," analysts at BofA Global Research said in a note.

Data released on Friday showed that India's foreign exchange reserves declined $15 billion week-on-week as of September 18, likely reflecting interventions to support the rupee.

Elsewhere, Asian currencies were on the defensive with the Thai baht down 0.6% and leading losses. The dollar index was little changed at 101.1.