Rupee Stabilizes at Mid-94 Handle Amid Rising Oil Prices

After an initial surge driven by intervention and strong inflows under the swap windows, the Indian Rupee (INR) has settled into a stable range around the mid-94 handle against the US Dollar. According to DBS Group Research, this stability is expected to persist despite rising oil prices and a supportive dollar due to US rate hike expectations.

The recent inflows have provided the authorities with additional firepower, reducing the risk of sharp rupee depreciation in the near term. However, the RBI's liquidity pressures persist, with the banking system surplus exceeding INR 10 trillion for the week, surpassing its 2022 and Covid highs.

Despite the expected shallow pullbacks in the USD/INR, recent inflation data is likely to show a quickening pace of 4.8-4.9% in August, driven by rising food prices and precious metals. This could lead to further upward pressure on bond yields if the RBI seeks to drain liquidity before the October meeting.