Indian Rupee Weakens on Importer Dollar Demand and Elevated Oil Prices

The Indian rupee faced downward pressure during Monday's trading session, slipping 0.18 percent to 95.1150 per dollar by 11:10 a.m. IST. The currency opened largely unchanged before coming under pressure due to dollar purchases by importers and a modest buildup in long dollar interbank positions.

The depreciation was further compounded by the absence of central bank dollar sales, which had previously provided support to the rupee in recent sessions. This absence highlighted the currency's sensitivity to persistent external headwinds when regular support measures are not deployed.

External factors, particularly energy costs, continued to weigh on the domestic unit. Brent crude rose more than six percent over the previous week to reach a six-month high, driven by supply disruption concerns following attacks on Saudi Arabia. Prices hovered near $115 a barrel during Asia trading.

Elevated oil prices tend to widen India's import bill, increase inflationary pressures, and impact economic growth. Such conditions often prompt companies to increase currency hedges while leading foreign investors to exercise greater caution regarding Indian assets.

In recent weeks, the rupee had found stability through Reserve Bank of India interventions that aided its recovery from levels near 96.70 per dollar, alongside inflows tied to the Jio Platforms IPO. Without these supporting factors, the currency remained exposed to steady dollar demand.

Additional external risks are anticipated later in the week with the upcoming Federal Reserve policy decision. While a rate pause is widely expected by markets, attention remains directed toward forward guidance and potential further tightening measures later in the year.

Meanwhile, official data showed that India's foreign exchange reserves decreased for the sixth consecutive week through October 16, falling by $5 billion to $721 billion. Total reserves are now down by more than $64 billion from their peak in the first week of September. Bankers have noted that this decline reflects the RBI's spot dollar sales to defend the rupee, alongside sell/buy swaps utilized for rupee liquidity management.

"The recent movement in the Indian rupee underscores the heavy reliance on central bank interventions to manage persistent external pressures, particularly elevated crude oil prices. When foreign exchange reserves decline alongside rising import bills, it creates a challenging environment for domestic liquidity and currency stability. Businesses and investors must closely monitor upcoming macroeconomic triggers, such as the Federal Reserve's policy decisions and oil price volatility, as these factors directly influence foreign exchange dynamics and capital flows in the Indian market." — Dr. Shishir Gupta, Founder & CEO, StartupLanes