Rupee Stays On Defensive With Traders Glued To Oil Moves

The rupee was hemmed in a tight band on Tuesday as corporate dollar demand and worries over the hit from elevated energy prices were blunted by state-run banks' dollar sales, most likely on behalf of the central bank.

The rupee closed at 92.37 per dollar, barely changed on day and hovering close to its all-time low of 92.4750 hit last week.

Iran launched fresh attacks on the United Arab Emirates on Tuesday with conflict in the Middle East in its third week, unnerving investors worldwide and stoking worries over how it could reshape growth-inflation dynamics.

Brent crude rose over 3% to $103.58 a barrel after several US allies rebuffed US President Donald Trump's call to send warships to escort tankers through the Strait of Hormuz, a vital artery for a fifth of global energy shipments.

Worries over how the conflict could impact India have reflected in rupee options trading activity with data showing that dollar/rupee call volumes are outpacing puts, indicating the market is positioning for further weakness in the currency.

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"Given the rise in oil prices, we expect the buying of USD by importers to increase, contributing to further pressure on the rupee," analysts at Barclays said in a note.

In addition to elevated dollar bids from importers, traders say exporters are reticent to hedge their future receivables as they expect the rupee to continue weakening.

In the near-term, the currency's outlook is entirely dependent on oil and the pace of moves the RBI will allow, a trader at a state-run bank said. "If oil prices remain elevated, breach of 93 is quite likely," the trader said.

Investors also face a crowded central bank calendar with decisions from the U.S. Federal Reserve, Bank of Japan, European Central Bank and Bank of England due this week.