The rupee came under pressure over fears that the Israel-Hamas conflict may draw in its neighbours. Concerns of escalation resulted in Brent oil futures firming up above $90 a barrel.
“The currency market is reacting to the tensions in Israel. If this escalates into a full-blown conflict with other countries, oil prices could shoot up,” said K N Dey, a forex consultant.
“US secretary of state Anthony Blinken visiting Israel twice in a week and the urgent meeting of Organisation of Islamic Cooperation at Saudi Arabia next week indicate that the situation is very fluid. Given the circumstances, it is unlikely that there will be any major inflows,” said Dey. He added that the extent to which RBI will allow the market to find its own level will determine the outlook for the rupee. “Once RBI moves out, it is very likely rupee would fall… it may touch 84 levels also,” he added.
The rupee is coming under pressure almost a year after the forex market witnessed volatility following an unexpected rise in interest rates in the US. It had breached the 83 level for the first time on October 19, 2022.
Dealers said the forex market was also concerned over the maturing of some sell-buy swaps undertaken by RBI last year to increase the dollar supply. If RBI does not roll over the transactions, there could be a shortage of dollars.
One of the positives for the forex markets was that macroeconomic fundamentals were strong compared to earlier periods of volatility. The trade deficit had narrowed to a five-month low of $19.5 billion in September. The inclusion of India in the JP Morgan Emerging Market Bond Index also improved the sentiment in respect of foreign investment.