Indian rupee drops to over one-week low as oil bubbles on Middle East worries

Mumbai, India witnessed the Indian rupee dropping to its lowest level in over a week on Thursday, as oil prices surged on concerns surrounding the intensifying conflict in the Middle East. The rupee lost 0.3% against the US dollar, reaching a fresh low of 95.44 per dollar, marking its most significant single-day decline since mid-July.

State-run banks, believed to be acting on behalf of the Reserve Bank of India, were observed selling dollars, though the extent of such dollar sales had subsided compared to the previous week. The central bank had previously injected $8 billion into the market to bolster the rupee, which kept it above the 95-per-dollar level. However, the scale of interventions appeared to have lessened due to the sharp rise in oil prices over the past week.

Simultaneously, the Reserve Bank tapped dollar-rupee sell/buy swaps to reduce excess INR liquidity from the banking system, conducting such operations for the second consecutive day on Thursday, focusing on operations maturing in September and December. Forward premiums surged, with the one-year annualized implied rate increasing by nearly 30 basis points over two days, reaching 3.37%, the highest since late May.

Meanwhile, most Asian currencies weakened, and the dollar index edged higher, while the euro remained unchanged as investors awaited decisions from the European Central Bank and the Federal Reserve/Bank of Japan, with the latter's policy decision anticipated next week. According to MUFG, the impending ECB meeting, coupled with the U.S. CPI report expected the following day, which is crucial for the Fed's rate decision this month, were contributing factors to the market's relative calm.