Indian rupee fell for the fourth consecutive day against to the UAE dirham on Friday with an intra-day low of 20.38. Image Credit: REUTERS

Dubai: Indian rupee fell for the fourth consecutive day against the UAE dirham on Friday with an intra-day low of 20.38.

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

The Indian rupee lost 19 paise on Friday to close 74.74 against the greenback as a firm dollar and expectations of further spike in crude oil prices weighed on investor sentiment.

Over the past week the rupee has lost 55 paise. Looking ahead the rupee is likely to remain under pressure on rising crude prices and relative strength of the dollar in the forex markets.

Crude weighs

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.

The current weakness of rupee is largely linked to the delay in OPEC+ decision on oil supplies and the rising curde price. Oil posted its sixth straight weekly gain, the longest winning streak since December, as the standoff between OPEC+ ministers over output extended negotiations to Monday.

Oil jumped more than 10 per cent last month with the summer driving season boosting demand for US crude and gasoline. The OPEC and its allies have thus far taken a gradual approach to increasign supplies.

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.

Dollar strength

The dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.05 per cent to 92.63.

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 in the week ahead 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-related restrictions ease. Additionally, upcoming massive government borrowings to cover COVID-related expenses combined with a potential rise in dollar interest rates could bring the rupee under pressure in the second half of the year.

Looking at the relatively weak economic fundamentals combined with potential surge in dollar demand in months ahead, Indian rupee could experience further downward pressure in the months ahead.