DBS Group Research economist Radhika Rao notes India’s onshore markets are being pulled between higher Oil prices and improving capital flows. Rising crude has lifted USD/INR and long-end bond yields, while the Finance Ministry warns high energy costs could pressure the current and fiscal accounts. Portfolio inflows and swap-window funding are recovering, yet the Indian Rupee (INR) remains weaker against the US Dollar (USD).

Oil shock versus improving capital flows

"India’s onshore markets are currently caught between two opposing forces: higher oil prices driven by renewed Middle East hostilities (and concern over Red Sea), and a strengthening inflows picture."

"A surge in benchmark crude prices pushed up USD/INR, necessitating a strong intervention response from the central bank to keep the domestic currency from revisiting record lows."

"The spot-neutral nature of inflows under the swap windows, increased hedging-related demand, authorities’ preference to mop-up inflows to gradually lower their exposure in the forwards book as well as a firm US dollar due to US policy tightening expectations, have constrained the room for sharp gains in the rupee."

"Overnight dollar pullback on Friday, will be briefly supportive of Asian currencies led by the yen, before the rupee returns to familiar play, with 95.00 to mark a floor."

"Despite the turnaround in inflows, the rupee has depreciated 1.1% this month, and a cumulative 6% on CYTD, against the dollar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)