Indian rupee battles oil, hedging drag; RBI shield, weak dollar cushion fall

The Indian rupee faced potential pressure on Friday, impacted by surging oil prices and persistent demand for hedging against foreign currency risks from importers. However, traders believe that the Reserve Bank of India's continuous intervention, a regular occurrence in recent trading days, along with a generally weaker dollar, will provide some protection to the local currency and keep losses in check.

The rupee was projected to open near the 95.74-95.78 range against the dollar, having closed at 95.7050 the previous day. Throughout the week, the currency has shown minimal fluctuation, staying within a narrow 30-paisa range, mirroring the pattern seen in the previous week. On a day-to-day basis, the rupee faced setbacks due to oil price fluctuations and importer hedging, with downward momentum temporarily halted by RBI's intervention.

Moreover, the dollar's decline, driven by the US Treasury's efforts to bolster long-term bond holdings, has benefited the RBI in its efforts to stabilize the rupee. Based on recent market trends, it is plausible that the RBI will intervene again, keeping the rupee within a narrow range and minimizing downside risks, according to a currency trader at a bank.

The RBI's support appears to have limited intraday volatility and prevented speculative activities, he added. The dollar, on the other hand, experienced headwinds on Friday and is on track for a weekly decline. Expectations are that the US Treasury's bond buyback initiative, while initially successful, is proving to be a short-lived fix.

The sell-off in longer-term US Treasuries resumed on Thursday, putting an end to the brief relief rally triggered by the Treasury Department's announcement of expanding buybacks of longer-duration securities in the next quarter. Despite US Treasury Secretary Scott Bessent's statement that the U.S. may make additional Treasury purchases, the situation remains uncertain.

Oil prices were also a contributing factor, with Brent crude hovering just below $94 a barrel on Friday, having risen over 2% in the preceding session. The price has climbed approximately 12% over the past two weeks, primarily due to ongoing uncertainty surrounding the outcome of the U.S.-Israeli conflict with Iran, which has heightened concerns about potential supply disruptions.