Indian Rupee Rises Amid Optimism on US-Iran Diplomatic Developments

Rupee Opens Higher as Crude Prices Cool

The Indian rupee opened 14 paise higher on May 29 after crude prices cooled overnight on reports that the United States and Iran had agreed to extend the ceasefire and allow traffic in the Strait of Hormuz. The deal reportedly awaits US President Donald Trump's nod.

The rupee was trading at 95.55 against the dollar after ending the previous session at 95.69. Currency and fixed income markets were closed on May 29 for Eid.

Brent Crude Falls 1.4 Percent

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Brent crude fell 1.4 percent to trade near $92 a barrel on hope of resumption of traffic through Hormuz, a vital energy route. This decline in crude prices is a welcome respite for the rupee, which has faced elevated Brent crude prices over the last three months.

Rupee's Depreciation

The rupee has depreciated 5 percent since the start of the war on February 28. Interventions by the Reserve Bank of India (RBI) have kept the rupee from sharply falling.

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The rupee's depreciation is a result of persistent foreign investor outflows and elevated Brent crude prices. However, if global risk sentiment continues to improve and crude oil prices remain under control, the rupee could gradually appreciate toward the 94.50-94.80 region in the near term.

US-Iran Ceasefire Extension

The US and Iran agreed to come together to extend the existing ceasefire for 60 days, subject to Trump's approval. Caution prevailed as both countries continue to work out the nuances of the potential peace agreement. News of the possible agreement came after a round of tit-for-tat attacks between the two countries.

If approved by leadership in Washington and Tehran, it would amount to the biggest step towards peace since the conflict began. Analysts at ING noted that the market has increasingly priced in a resolution this week. Therefore, any confirmation of a deal that reopens the strait means that significant further downside is likely limited, particularly during the early stages of a ceasefire.

Macro-economic Risks

Elevated oil prices present steep macroeconomic risks to India, which imports over 80 percent of its energy requirements. Reflecting the risks, wagers against the Indian rupee, Philippine peso, and Thai baht also stayed elevated, underscoring caution toward Asia's net oil importers.