Indian rupee to edge higher as oil slips; inflow haul caps bearish bets

On Tuesday, the Indian rupee is anticipated to open slightly stronger, as falling crude oil prices and elevated US Treasury yields boost risk appetite, while demand for hedging by importers limits gains. The central bank's interventions to fortify the balance of payments have resulted in $143.6 billion inflows, as revealed on Monday, enabling the monetary authority to tightly control expectations of rupee depreciation.

The currency is expected to open around 95.75 to 95.80 per dollar, marginally up from its previous close of 95.8150. Brent crude oil prices are presently hovering around $100 per barrel, awaiting possible US-Iran negotiations at the United Nations General Assembly. Oil prices remain a crucial factor for the rupee, as investors monitor its effect on India's import expenses, alongside the possibility of interest rate hikes by the central bank.

The Federal Reserve and the Bank of Japan both increased rates last week, prompting traders to speculate on potential rate hikes by the Reserve Bank of India as well. The rupee is expected to remain within the 95-96 band prior to the policy decision, according to a trader at a state-run bank. Moreover, forward premiums may exhibit a more substantial response to rate decisions than the spot rupee.

The Indian central bank has been actively intervening in the foreign exchange market to bolster the rupee, and traders anticipate its continued support. Analysts at Natixis predict that the Reserve Bank of India may need to raise interest rates to reinforce the rupee, with projections of 50 basis points hikes by the end of 2026.

Traders are pricing in a 56% probability of a US rate hike in October, compared to 43.5% a week earlier, as indicated by the CME FedWatch tool.