Indian rupee snaps eight-day rally as oil climbs to highest since May

Mumbai saw the Indian rupee lose its eight-day winning streak on Thursday as Brent oil prices reached their highest point since May, driven by growing concerns over Middle East conflict. The South Asian currency experienced a volatile trading day, fluctuating from its strongest level in over six weeks to close down 0.4% at 94.8175 per dollar.

Earlier in the day, substantial foreign inflows for Jio Platforms' IPO provided some support from the Reserve Bank of India's defensive measures, but the currency's gains were short-lived as oil prices rose in the later part of the session. Traders noted that broad-based dollar demand domestically, combined with a risk-off sentiment in global markets, played a role in the rupee's decline.

MSCI's All-World index was on track for its largest daily drop in two weeks, falling 0.4%, as tech shares worldwide faced pressure. Equity futures signaled a weak opening for stocks on Wall Street as well. Elevated oil prices persist, despite Gulf oil flows continuing, reflecting market worries over the conflict. "The significant risk premium presently embedded in prices is unlikely to dissipate until clear indications of de-escalation arise and assure investors that regional supply will remain uninterrupted," stated ING in a recent note.

Brent oil prices climbed 3.3% to $112.40 per barrel. As India imports nearly 90% of its crude, the country is among the most susceptible economies to Middle East oil shocks, posing a key risk to the rupee. Opinions among market participants and observers vary on the appropriate course for the RBI to take in defending the currency against these fundamental pressures.

While a prominent IMF official suggested allowing the dollar-rupee exchange rate to fluctuate as the primary defense, a former RBI deputy governor cautioned that exchange rates tend to overshoot, potentially leading to financial stability risks.