Indian rupee to extend slide; oil rally, surging US yields chip away at RBI support

The Indian rupee is on track to further its weekly decline at the start of trading on Friday, as oil prices surge, US Treasury yields rise and risk aversion intensifies. The currency is expected to open in a range of 95.62 to 95.68 against the dollar, following its settlement at 95.44 in the previous session. The Indian rupee has already shed around 1% over the past three days, and a continued depreciation could erase the gains made by the Reserve Bank of India (RBI).

RBI support, buoyed by an influx of overseas Indian deposits, had earlier pushed the rupee from near 95.70 to a two-month peak of 94.30. However, this support is now facing headwinds from rising oil prices. Brent crude oil skyrocketed over 6% on Thursday and continued its upward trend, approaching $110 per barrel in Asian markets, fueled by attacks on shipping routes in the Middle East.

Oil prices have risen by nearly 12% this week, contributing to a 8% increase last week. Oil has emerged as a significant factor influencing the rupee's performance, prompting traders to caution that the RBI may be hesitant to provide substantial support given the intense negative forces. India is heavily reliant on oil imports, and a persistent rise could exacerbate its external sector imbalances, impacting growth and inflation.

Meanwhile, US yields have climbed following robust inflation data, which have heightening expectations of an upcoming Federal Reserve rate hike. The U.S. producer price index for final demand increased 0.4% in the latest month, up from the upwardly revised 0.1% gain in July. Consequently, the market now anticipates a 70% probability of a Fed rate increase next week, driving 10-year U.S. yields to near 5%. Asian equities have stumbled, and currencies have generally weakened.