The Indian rupee fell to its weakest level in almost a month on Wednesday. This occurred after US President Donald Trump announced that the temporary agreement with Iran to end the war was concluded. This statement triggered a sharp rise in oil prices and negatively impacted Asian currencies.
Market reaction and currency changes
Traders speculated that the Reserve Bank of India intervened in the foreign exchange market by selling dollars through state banks to limit the rupee's decline. The currency closed at 95.5550 per dollar, representing a 0.6% drop for the day. Previously, it had reached the 95.60 mark, which was the lowest level since June 11.
Rise in energy prices
Oil prices increased by approximately 6% on Wednesday, reaching a two-week high. This followed US President Donald Trump's announcement that the memorandum of understanding concluding the conflict with Iran was 'finished,' which once again heightened concerns about potential disruptions in Middle Eastern oil supplies.
Impact on financial markets
Indian stocks dropped by 2%, the sharpest decline in over three months, while the yield on 10-year bonds rose by 8 basis points. Diraj Nim, an economist and FX strategist at ANZ, noted that in the near term, the main focus would be on oil prices, as well as any signs of a broad dollar strengthening. He added that as long as oil prices remain high, the rupee is likely to face pressure.
The increase in oil prices poses a significant risk for India, which is a net energy importer, and sustained growth could slow economic growth and fuel inflation. One trader at a Mumbai-based bank commented that 'just when it seemed macroeconomic indicators were improving, uncertainty in the Middle East has reappeared,' referring to the recent shift in sentiment towards Indian assets after the temporary ceasefire and several policy measures aimed at attracting dollar inflows.
This same trader added that 'TACO-type deals (Trump Always Chickens Out) might occur, but markets may not be as easily convinced as last time.' Meanwhile, global stock and bond markets experienced a downturn as investors began withdrawing funds from riskier assets. US stock index futures fell sharply on Wednesday, with Nasdaq futures touching a four-week low, and the yield on US 10-year Treasury bonds rose to a peak of 4.585%, the highest level in over a month.
