Summary of this article
RBI intervenes as rupee nears record low against the dollar.
Rising crude oil prices increase pressure on India's currency.
Foreign currency inflows remain below market expectations despite policy measures.
The Reserve Bank of India (RBI) has intervened in the foreign exchange market after the rupee weakened sharply against the US dollar, moving closer to its record low amid a fresh surge in global crude oil prices.
Rupee Under Pressure As Oil Prices Rise
The rupee fell as much as 0.2 per cent during the day to 96.4575 against the US dollar, bringing it close to its record low of 96.9650 touched in late May. At the same time, the yield on the benchmark 10-year government bond rose by 4 basis points to 6.82 per cent, reflecting pressure in financial markets.
According to a news report by Bloomberg, the RBI has sold US dollars in both the offshore and onshore foreign exchange markets to support the domestic currency. The intervention came as higher crude oil prices increased demand for dollars and weighed on the rupee.
Higher Crude Prices Add To Pressure
Global crude oil prices have risen by more than 20 per cent over the past two weeks, with Brent crude crossing USD 90 a barrel on Monday. The increase has been linked to rising tensions in the Middle East, where fresh exchanges between the US and Iran have raised concerns over supply disruptions.
The rise in oil prices is significant for India because crude oil accounts for more than two-thirds of the country's import bill. Higher import costs increase demand for US dollars, putting pressure on the rupee and adding to concerns over India's foreign exchange reserves.
Earlier Measures Lose Momentum
The rupee had strengthened in late June after the RBI and the government announced steps on June 5 to attract more foreign currency into the country. These included easing investment rules for domestic bonds and encouraging non-resident Indians to increase foreign currency deposits.
Following those measures, the rupee had appreciated to around 94.1413 against the dollar. However, the gains have since been reversed as rising oil prices renewed demand for the US currency.
Market participants also believe that inflows from foreign currency non-resident (FCNR) deposits have been slower than expected. According to estimates by Barclays, FCNR-related inflows could reach between USD 25 billion and USD 30 billion in the coming months under its base case scenario. This is below market expectations of about USD 40 billion to USD 50 billion.
According to the news report, the government and RBI have also asked banks to step up efforts to mobilise foreign currency deposits from non-resident Indians to strengthen foreign exchange inflows and reduce pressure on the rupee.
