Rupee breaches 96/$; 10-year bond yield rises 6 bps on oil price surge

The rupee weakened past the 96 per dollar mark for the first time in nearly two months on Tuesday as a surge in crude oil prices and persistent importer demand outweighed dollar sales by state-run banks on behalf of the Reserve Bank of India (RBI).

Moreover, the benchmark 10-year government bond yield rose 6 basis points (bps) to 6.79 per cent from 6.73 per cent on Monday as rising oil prices stoke inflation fears.

The domestic currency settled at 96.20 per US dollar, down 0.6 per cent from Monday’s close of 95.62, extending its two-day decline to 0.91 per cent. The rupee was the worst-performing Asian currency for a second consecutive session, tracking a sharp rise in crude oil prices amid escalating tensions in West Asia.

“The rupee has continued to weaken because RBI’s interventions have been at a slower pace than expected, given its existing positions, while overall flows have remained negative. The hurdle at 95.80 was broken, triggering further short covering,” said Dilip Parmar, senior research analyst, HDFC Securities.

“The FCNR (B) inflows have been lower than market expectations. Around $7 billion came in during the first fortnight [after FAQ], taking total inflows to about $10 billion so far, but the pace has since slowed. The market was expecting $30-50 billion of inflows, but renewed geopolitical uncertainty has kept the flows on the lower side, causing the rupee to give up the strength seen earlier,” he added.

Brent crude climbed above $85 a barrel after renewed attacks in West Asia heightened concerns over supply disruptions, boosting demand for the safe-haven US dollar. Higher oil prices are expected to widen India’s import bill and increase dollar demand from oil marketing companies (OMCs) and other importers.

Dealers said public sector banks were seen selling dollars on behalf of the RBI through the session, although the intervention was aimed at smoothening excessive volatility rather than defending any specific level.

“It is not that the RBI is absent. The central bank has been present over the last two sessions, but importer demand is simply outpacing the intervention,” said a treasury official at a private bank.

Market participants said the RBI is unlikely to intervene aggressively given its sizeable outstanding short forward dollar position of around $106 billion, and the need to conserve foreign exchange reserves. The central bank is managing a large forward book, limiting its appetite for large-scale intervention in the spot market, dealers said.

“The significantly wider trade deficit has increased structural demand for US dollars and has emerged as one of the key factors weighing on the rupee. For USD-INR 95.20 acts as a base while 96.50 first immediate resistance followed by 96.80 levels,” said Kunal Sodhani, head of treasury, global trading centre, Fx & rates treasury, Shinhan Bank India.

Data released on Monday showed the merchandise trade deficit widened to $30.43 billion in June as exports fell faster than imports, caused by shipping disruptions in the Strait of Hormuz linked to the West Asia conflict.

Traders expect the RBI to use inflows under the FCNR (B) deposit scheme primarily to replenish foreign exchange reserves rather than support the rupee aggressively. While around $10 billion has materialised so far, the market expects total inflows of $50 billion to $60 billion.

According to the latest RBI data, India’s foreign exchange reserves stood at $674.19 billion for the week ended July 3.

The rupee has depreciated 10.62 per cent over the past year. It fell 5.43 per cent since the start of the West Asia conflict in late February.

Government bond yields also hardened as the closure of the Strait of Hormuz fuelled concerns over global energy supplies and inflation. Market participants said higher crude prices, coupled with a stronger-than-expected consumer price index (CPI) reading on Monday and an elevated wholesale price index (WPI) print on Tuesday, reinforced expectations that inflationary pressures remain elevated.

India’s retail inflation, measured by the CPI, rose to 4.38 per cent in June, breaching the RBI’s medium-term target of 4 per cent.