Oil prices drop amid hopes for US-Iran truce

MUMBAI: The Indian rupee is likely to remain under pressure on Friday as traders assess the potential US-Iran truce and the effects of rising global bond yields on risk assets. The rupee is currently hovering around the 96 per dollar mark, slightly weaker than its previous close of 95.9550 and susceptible to further declines without central bank support.

US and Iranian delegates in New York are discussing a step-by-step approach to end the conflict, which would include Iran reopening the Strait of Hormuz and the United States removing its economic sanctions on Iran, according to Reuters on Thursday. Brent oil prices dropped 0.5% on Friday, settling at $106 per barrel. In the meantime, global bond yields have climbed, with the 30-year US Treasury yield reaching its highest level since 2004 following additional Federal Reserve officials indicating that further interest rate hikes might be required to combat soaring inflation.

Markets now estimate a 70% probability of a Federal Reserve rate increase in October, as per CME’s FedWatch tool. These rate hike forecasts have also bolstered the dollar index, which has climbed nearly 2% over the past month. The combination of anticipated global rate hikes, fluctuating oil prices, and declining portfolio inflows have all contributed to the rupee's struggles this month.

While the Reserve Bank of India's repeated interventions have managed to curb volatility, traders anticipate the trend to continue in the near future, with the 96-per-dollar level acting as a crucial psychological support point for the South Asian currency. ANZ warns that it would be wise to refrain from aggressively defending the exchange rate at any price, risking reserves.

Instead, they predict RBI to permit a controlled depreciation in line with global financial and commodity market conditions, projecting the INR at 96.50 by December and 98.30 by the end of next year.