MUMBAI: The Indian rupee strengthened on Monday and government bond yields declined after the US and Iran announced a peace agreement, triggering a sharp fall in crude oil prices and improving sentiment across emerging markets.
The rupee opened at 94.6850 against the US dollar, compared with Friday’s close of 95.1175, as traders reacted to reports that Washington and Tehran had reached a deal that would keep the Strait of Hormuz open for commercial shipping and begin negotiations on Iran’s nuclear programme over the next 60 days.
The development led to a broad risk-on rally in global markets and pushed Brent crude prices down to about $83 a barrel, almost 8% lower than levels before news of the agreement emerged. Lower oil prices are positive for India, one of the world’s largest crude importers, as they reduce pressure on the country’s , inflation and currency.
Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services, said immediate support for the rupee is seen at 94.70 followed by 94.30, while resistance is placed at 95.40 and 95.80.
“We expect USD/INR to dip to 94.00 to 93.00 by September, reflecting the combined impact of the peace deal and the capital inflow scheme,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “We maintain an expectation of USD/INR at 95.50 by December. RBI will absorb the capital inflows (FCNR(B) and ECB) via swaps and also allow its existing near-term swaps to mature. Hence, over FY27 we expect moderate INR depreciation.”
The Reserve Bank of India’s recent measures to encourage foreign currency deposits and bearing the full hedging costs for external commercial borrowings by banks and state-owned companies are expected to attract at least $30 billion-50 billion of capital inflows in the coming months, adding support to the rupee.
Crude oil prices
However, some market participants said the rupee’s path hinges on crude oil prices.
“I think our trajectory is all dependent on crude,” said Rajeev Pawar, treasury head at Ujjivan Small Finance Bank. “Crude has come into the 80s. If it stays around here or goes a bit lower, then yes, things could look good. But if it does not go lower from here, then whatever movement is there has already been priced in to a large extent.”
He expects gains to be capped.
“I think for the rupee to go below 94 is not going to be possible. So maybe a plus or minus 50 paise from here we can expect,” Pawar said.
Since the started on 28 February, the local unit had depreciated by 5% after declining by 11% in FY26, according to data by the National Securities Depository Ltd.
On the bond market front, India’s benchmark 10-year government bond yield fell about 4 basis points to about 6.86% on Monday, tracking declines in US Treasury yields and lower oil prices. Easing reinforced expectations that inflation risks could remain contained, improving the outlook for domestic fixed-income markets. Still, there may not be a dramatic rally from current levels, according to Pawar.
“Bond yields have already moved a lot… maximum we will see, maybe at best yields would be down to 6.75%,” he said. “Unless, of course, there is conviction that there would be a rate hike in August.”
Since the US-Iran war broke out, the yield on the 10-year benchmark bond had risen as much as 42 bps to hit a high of 7.13% on 18 May, according to data by Bloomberg.