The Indian rupee opened marginally higher at 95.70 against the US dollar on Thursday, 4 June, gaining 1 paisa at the start of trade. However, the local currency remains under pressure from persistent foreign fund outflows, weak regional currencies and lingering geopolitical uncertainty in the Middle East.
Investor sentiment has been weighed down by fading hopes of a breakthrough in US-Iran negotiations, raising concerns that the conflict could drag on for longer than expected. A prolonged escalation in the region poses a significant risk for India, one of the world’s largest net importers of crude oil.
Foreign portfolio investors continued to pare exposure to Indian equities, with preliminary data showing net outflows of nearly $600 million on Wednesday, following around $3 billion of selling over the previous three trading sessions. The pace of outflows in June has already almost matched the total recorded in May.
Currency traders, as per a Reuters report, noted that the combination of sustained equity outflows and renewed tensions in the Gulf has revived upward pressure on the dollar-rupee pair. However, market participants expect potential policy measures to support the rupee, which could help cushion the currency against further weakness amid the fallout from the US-Iran conflict.
Oil, the rupee’s old rival
According to market experts, renewed attacks involving Iran and Kuwait, coupled with heightened military activity near the Strait of Hormuz, have reignited concerns over global energy supplies and disrupted sentiment across financial markets. The developments pushed crude oil prices nearly 2% higher, underscoring the vulnerability of one of the world’s most important energy shipping corridors.
Experts note that rising crude prices pose a particular challenge for India, which imports the bulk of its oil requirements. Higher oil prices increase the country’s import bill and raise demand for US dollars, often exerting downward pressure on the rupee. They add that sustained strength in crude could also fuel inflationary pressures and widen India’s current account deficit, making currency stability a key area of concern for policymakers and investors alike.
All eyes now on RBI
According to market experts, investor focus has now shifted to the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting scheduled for June 5. While monetary policy discussions typically revolve around growth and inflation, policymakers are this time grappling with additional challenges, including a weakening rupee, elevated crude oil prices and evolving global interest-rate expectations.
Experts believe these factors have increased the likelihood of a relatively hawkish tone from the RBI as it seeks to balance inflation risks with growth concerns. They note that the central bank faces a delicate task of supporting economic expansion while containing price pressures and maintaining financial stability. Any signals on inflation management, liquidity conditions or currency stability will be closely watched by markets.
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