RBI steps in to support rupee as Iran war, PM Modi's remarks spook traders

A jump in crude oil prices after US-Iran peace talks hit a stalemate and Indian Prime Minister Narendra Modi's urging ​of citizens to conserve foreign exchange spooked currency traders on ​Monday, sending the rupee past 95 per dollar, which drew likely market ‌intervention by the central bank.

Indian assets were under pressure across the board with the rupee down 0.75 per cent at 95.1850 per dollar while the benchmark equity index Nifty 50 fell over 1 per cent and the yield on the 10-year benchmark note rose 5 basis points to 7.03 per cent.

The renewed pressure on Indian markets came after US President Donald Trump on Sunday rejected Iran's response to a US proposal for peace talks to end the war, saying Tehran's demands were "totally unacceptable."

 

Brent oil futures jumped 4 per cent in Asian trade to $105.7 a barrel. Higher oil prices are a major ‌risk for net energy importer India and threaten to widen the country's current account deficit, slow growth and stoke inflation.

Over the weekend, Prime Minister Modi urged a spate of measures including fuel conservation, fewer imports, as well as reduced travel as a surge in energy prices takes a toll on the country's foreign exchange reserves.

On Monday, traders pointed to dollar sales from state-run banks that were likely on the Reserve ​Bank of India's behalf, intended to cushion the rupee's decline.

State-run banks were selling dollars but have ‌not been persistent, which could open room for further losses later in the session, a trader with a Mumbai-based bank said.

Since the Iran war broke out ​in ‌late February, the rupee has declined over 4 per cent and the Nifty 50 has fallen 5 per cent, ‌accompanied by a near 40 bp rise in India's 10-year sovereign bond yield.

Asian currencies were down between 0.3 per cent to 1 per cent on the day.

"As energy-related disruptions linger, rising ‌risks ​of fuel shortages ​could pose a more differentiated challenge ... particularly for economies with relatively low crude inventory buffers. This includes India and several ASEAN markets such as the ‌Philippines, Vietnam, and ​Indonesia," analysts at MUFG said in a note.