Indian rupee hooked to oil prices as markets gauge Iran diplomacy hopes

MUMBAI: The Indian rupee is expected to open nearly flat around 95.60-95.65 per dollar on Wednesday, with traders anticipating its direction to be influenced by oil prices in the hopes of a diplomatic resolution to the US-Iran conflict, as discussions take place at the UN. The Indian rupee opened at 95.59 per dollar on the previous trading session.

Oil markets continue to be the primary driver for Indian assets, with Brent crude futures trading close to two-week lows at $99.22 per barrel, following optimism that UN General Assembly diplomacy could lead to a resolution of the Middle East war. US President Donald Trump on Tuesday voiced his readiness to "annihilate Iran" in the absence of a deal but also hinted at a potential agreement soon.

Analysts at MUFG noted that "for Asia in particular, the good news is that oil prices have moderated somewhat from the highs," yet they cautioned that "the path forward remains unclear given the lack of clarity around a possible resolution of the conflict." Regional currencies saw mixed trading while shares across Asia were mostly higher, supported by indications of strong consumer demand for AI applications.

India has lagged behind other regional equity markets due to its limited AI-linked investment opportunities, which have contributed to a decline in foreign inflows into its stock market. Foreign traders have sold Indian shares totaling $1.81 billion thus far in September, pushing year-to-date outflows to $25.87 billion, according to data from the stock depository.

The weakness in capital flows, coupled with strain caused by high energy costs, has resulted in pressure on the rupee, which has been somewhat mitigated by frequent central bank interventions, thereby preventing further significant losses. Traders believe that this trend is likely to continue in the near term, particularly following the central bank's substantial inflow of capital via one-off policy measures to attract foreign currency, which has elevated India's foreign exchange reserves to a record high.