Rupee Drifts As Oil Dips; Hawkish Fed Risks, Importer Flows Cap Gains

The rupee traded in a narrow band on Monday as signs of progress in US-Iran peace talks pulled oil prices lower, supporting sentiment, while expectations that the Federal Reserve may raise rates this year kept traders cautious.

Importer hedging flows limited gains in the rupee, which has been hovering near its strongest level in over a month in the last few trading sessions.

The rupee was at 94.40 per dollar, marginally lower than its close at 94.32 on Friday.

Markets are digesting a turbulent weekend of US-Iran peace negotiations.

The first round of talks between US and Iranian officials in Switzerland ended Monday, mediators said, after a tense opening marked by Tehran's announcement it had again closed the Strait of Hormuz and US President Donald Trump repeating his threats to resume attacks on Iran.

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A joint statement from mediating nations Qatar and Pakistan said the US and Iran agreed to a roadmap toward a final deal within 60 days.

Brent crude oil prices fell about 1.5% to $79.4 per barrel, well below their conflict-period peak of $126.4 hit in late April.

While a sharp drop in oil prices has offered some comfort to the currencies of Asian energy importers, including India, the risks of higher U.S. interest rates have tempered hopes of a sustained relief rally.

"Monetary officials will remain on guard in Asia: a bouncy US dollar means that there is little reprieve for now, with a tightening bias still needed for most," Frederic Neumann, chief Asia economist at HSBC, said in a note.

India's rate panel kept rates on hold earlier this month to assesswhether higher oil and food prices are likely to lead to more generalised inflation.

Analysts at HSBC, however, expect the central bank to deliver 50 basis points of hikes in the second half of the year.