Interventions hold Indian rupee on narrow leash, traders await US sanctions on Iran

Mumbai witnessed a subdued trading session for the Indian rupee on Monday as the Reserve Bank of India continued to intervene in the forex market, keeping the currency confined to a narrow range, traders noted. The rupee closed at 95.7450 per dollar, fluctuating within a range of about 10 paisa throughout the session. State-run banks were believed to be facilitating these interventions, likely on behalf of the Reserve Bank of India, according to traders.

Over the past two weeks, the rupee's volatility has been remarkably low, ranking among the least volatile among Asian currencies. The currency's 2-week realized volatility has dropped below 2%, while the 1-month implied volatility, reflecting future expectations, has decreased to around 4%, a significant reduction from its year-to-date average of 5.2%.

A trader at a Singapore-based hedge fund remarked, "It appears that the central bank aims to discourage any inclination to bet against the rupee, but whether that is effective will become evident once intervention ceases."

Traders anticipate the rupee to remain between 95.50 and 96.50 in the short term, with a sustained decline in oil prices considered crucial for a substantial recovery. The Middle East conflict has fueled uncertainty regarding the resumption of oil supplies from the region, which has been disrupted since the Iran war. Morgan Stanley analysts, in a recent note, forecasted a more protracted recovery of Middle East oil supplies, potentially leaving the market with an undersupply for the fourth quarter of 2026 and the first quarter of 2027.

This situation is causing the analysts to revise their Brent oil price forecasts upwards, projecting a peak of $100 per barrel by the fourth quarter of 2026.

India's heavy dependence on crude imports, accounting for nearly 90% of its energy needs, makes the country particularly susceptible to Middle East oil shocks. Meanwhile, the dollar index gained 0.2% to 99, while most Asian currencies and regional stock indexes experienced a decline. India's benchmark Nifty 50 index fell by approximately 0.3%, outperforming the 1.5% drop in MSCI's regional stock index excluding Japan.