Indian rupee set to weaken as oil prices and US yields rise

The Indian rupee is expected to open weaker against the US dollar on Thursday, with traders projecting an opening range of 95.96 to 95.98, after the currency settled at 95.83 on Wednesday. Higher oil prices and rising US Treasury yields are weighing on the currency, traders said, while fading expectations of a Federal Reserve rate increase at this month's meeting have offered little relief.

Brent crude for December delivery rose nearly 2% on Wednesday amid stalled US-Iran talks and tightening fuel markets, extending a September rally of around 14%. The 10-year US Treasury yield climbed to near its highest level since 2007, shrugging off softer-than-expected August inflation data, as lingering inflation concerns kept pressure on longer-dated yields. US bond yields posted their biggest monthly rise in years in September, with the 10-year yield recording its largest quarterly jump since 2009. The ongoing Middle East conflict was cited as keeping oil prices high and fuelling concerns over the inflation outlook.

Traders put the odds of a Federal Reserve rate increase this month at below 40%, down from more than 70% a week earlier. Even so, the softer August inflation reading did not deliver sustained relief at the long end of the curve, where inflation concerns continued to weigh on yields.

The rupee has pared losses from around 96.14 per dollar, a level it touched on Tuesday, helped by what traders described as likely Reserve Bank of India intervention. Traders said the central bank appears intent on preventing a sustained break past the 96 level.

Anil Bhansali, head of advisory at Finrex Treasury Advisors, said the 96 level remained an important psychological and technical area, with the rupee showing some resilience each time it approached that level, thanks largely to the Reserve Bank of India. He said the rupee's downside pressure would persist with oil prices elevated and US yields on the rise, leaving RBI intervention to largely contain, rather than turn, the move.