Indian rupee
Indian rupee slipped to 20.36 against the UAE dirham on Wednesday morning following a decline of the currency against the US dollar by 15 paise to 74.70. Image Credit: Bloomberg

Dubai: Indian rupee slipped to 20.36 against the UAE dirham on Wednesday morning following a decline of the currency against the US dollar by 15 paise to 74.70.

The rupee’s decline against the dirham is a reflection of the decline of the Indian currency's fall against the US dollar of which the UAE currency is pegged.

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Forex traders said firm American currency, rising crude oil prices and broad weakness in the domestic equity market also weighed on investor sentiment.

At the interbank foreign exchange, the rupee opened at 74.60 against the dollar, then fell further to 74.70, registering a fall of 15 paise over its previous close.

On Tuesday, the rupee had closed at 74.55 against the US dollar. The Indian rupee started on a weaker note this Wednesday against the greenback tracking broad dollar strength and weak regional risk appetite.

Looking ahead the rupee is likely to remain under pressure on rising crude prices and relative strength of the dollar in the forex markets.

Asian currencies have started weaker against the American currency this morning and could weigh on sentiments, the note added.

Global oil benchmark Brent crude futures fell 0.03 per cent to $74.55 per barrel.

On the domestic equity market front, BSE Sensex was trading 14.54 points or 0.03 per cent higher at 52,875.72, while the broader NSE Nifty advanced 0.60 points to 15,817.65. Foreign institutional investors were net sellers in the capital market on Tuesday as they offloaded shares worth Rs 5.43 billion, as per exchange data.

Inflationary pressures

India relies on imported crude for 80 per cent of its needs, which mean that domestic inflation is sensitive to changes in the price of global crude oil benchmarks. Increases in Brent oil prices have a negative impact on India’s terms of trade and by extension, the strength of the rupee.

India’s foreign exchange reserves stood at $598 billion at the end of May 2021, equivalent to 17 months of imports.

Oil jumped more than 10 per cent last month with the summer. The world's third-biggest oil consumer, India, is concerned about domestic price pressures, with the nation expecting fuel consumption to return to pre-pandemic levels by the end of this year.

With the prevailing uncertainty on crude supplies, analysts expect the range for rupee could be 74.60 - 75.20 in the week ahead.

Although the rinsing crude prices are likely to worsen terms of trade, India holding close to $600 billion in forex reserves is likely to see some central bank intervention to keep the currency stable against a steep fall.

Rising forex reserves have been helping the rupee to stand its ground in recent months. However, the supply demand dynamics in the forex markets could change once imports gain momentum when COVID-19 related restrictions ease. Additionally, upcoming massive government borrowings to cover COVID-19 related expenses combined with a potential rise in dollar interest rates could bring the rupee under pressure in the months ahead.