The Indian rupee slumped to its weakest level in over a month on Tuesday, pressured by higher oil prices amid renewed hostilities in the Middle East, while likely central bank intervention contained losses.
The rupee touched a low of 96.2375 per dollar, its weakest level since May 22, before ending the session down 0.6% at 96.20.
Brent crude oil futures climbed over 4% to $87 per barrel after the U.S. reimposed a naval blockade on Iran, while renewed attacks between Washington and Tehran heightened concerns over energy flows.
Indian equities took a hit as well, with the benchmark Nifty 50 index declining 0.7%, while the yield on the 10-year benchmark bond rose 6 basis points.
"Bias of USD/INR had shifted to 'sell on upticks' last month, but that is yet again turning towards a 'buy on dips,'" a trader at a foreign bank said.
In the near-term, the rupee is likely to remain highly sensitive to oil prices, and traders will closely watch how firmly the central bank defends the currency, the trader added.
On Tuesday, traders flagged likely dollar sales by the Reserve Bank of India across the spot and non-deliverable forward markets, helping contain the rupee's losses.
Market participants are also keeping a close eye on the scale of inflows generated by India's policy measures announced last month.
The country's special deposit programme for overseas Indians has attracted about $10 billion so far, Reuters reported on Tuesday.
Attention now turns to a key U.S. consumer inflation report due later in the day, which could shape expectations around potential rate increases by the Federal Reserve.
"Short-term momentum is swinging back in favour of the dollar as the FX market is finally starting to take the Gulf re-escalation more seriously," ING said in a note.
