Oil Price Strain Keeps Rupee Near Record Low, State Banks' Dollar Sales Provide Cushion

Indian Rupee on Course for Over 1% Weekly Drop Amid Elevated Oil Prices

The Indian rupee slipped on Friday, on track for an over 1% weekly decline, as oil prices remained above $100 per barrel. Despite dollar sales by state-run banks helping the currency avoid a record low, the rupee's value continued to dwindle.

The rupee fell 0.2% to 95.94, hovering near its record low of 95.9575 hit in the previous session. Brent oil prices surged more than 1% to $107 per barrel, following comments from U.S. President Donald Trump indicating that he would not be "much more patient" with Iran.

The more than five-week ceasefire between the U.S. and Iran remains fragile, with neither side appearing close to a deal to end the war. Elevated oil prices have put additional pressure on the rupee, compounded by higher U.S. bond yields on Friday. The 10-year U.S. bond yield rose to 4.53%, its highest in a year, as concerns over energy-driven inflation fueled bets of a Federal Reserve rate hike this year.

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In a move to mitigate the effects of oil price increases, India raised petrol and diesel prices for the first time in four years by more than 3%, becoming one of the last major economies to hike retail fuel prices. Indian interest rate swap markets are currently pricing in about 90 bps worth of rate hikes over the next 12 months.

Market analysts expect policymakers to continue implementing measures to contain non-essential consumption, limit import bills, and conserve foreign exchange. They also anticipate steps to encourage foreign capital inflows. Despite recent media reports outlining possible steps to boost dollar inflows, the underlying trend of weak dollar inflows remains intact, keeping the rupee's depreciation trend intact.

Investors are awaiting India's merchandise trade data for April, due to be released later on Friday.