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Rupee flat on hopes West Asia truce will hold
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Mumbai: The Indian rupee was little changed through a day of steady gains in risk assets across most of Asia and Europe amid expectations the uneasy West Asian truce - and oil prices - will hold, lending some stability to the local unit that has cumulatively lost about a percentage point on average each month since the start of FY26.Benchmark 10-year sovereign note yields, too, stayed below 7% for the second day running, retreating in lockstep with US bond yields that headed for their lowest level in about two weeks, Reuters reported.The rupee closed at 95.69 per dollar Wednesday, barely changed from 95.68 in the previous session. Oil prices fell while dealers reported episodic interventions by the central bank that bolstered the local unit. "Markets were calm throughout the day as crude oil prices were falling. There were no further items of news of any further developments in the ongoing US-Iran war that helped stabilise the currency," said a dealer at a public sector bank.Brent lost more than 3% to $96.5 per barrel, according to Reuters.Across Japan and South Korea, stocks climbed to a record amid lower oil prices and big-bang AI investments, while pan-Europe stocks climbed amid an unmoved dollar index around 99.The rupee opened at 95.75 and traded at its weakest level of 95.80 during the day, where dollar sales from state run banks, likely on behalf of the central bank, helped stem further losses. The currency traded between 95.80 and 95.64.The rupee has weakened nearly 3% in FY27 so far.
Beyond war-related inflation fears, longer-term borrowing costs in the US are increasingly being driven by a rise in so-called real yields, which strip out inflation, indicating bond investors aren't just worried about price pressures from the Iran war. Other culprits include signs already large public debt burdens will swell even further, fallout from the AI investment boom and the mounting chance central banks such as the Federal Reserve will raise rather than cut interest rates. The speculation, highlighted by strategists at ING Bank NV, Goldman Sachs Group and Barclays Plc, is that the recent jump in some long-term yields will not fully reverse even if the inflation spurred by costlier oil retreats. That risks keeping market borrowing costs elevated around multi-year highs even after the conflict ends, maintaining pressure on governments and economies. "The argument that duration is selling off globally due to inflation fears is hard to square with market pricing of medium- and long-term inflation risk," said Jonathan Hill, head of US inflation strategy at Barclays. "Instead, the interaction between rising debt levels, potentially higher neutral rates, and AI could be driving real rates higher." The neutral rate is the level which neither spurs nor slows the economy. While the surge in oil prices may be capturing headlines, breakeven rates that measure the inflation expectations of bond-markets haven't risen as far as overall rates in the US and UK. Hill notes that even amid war, 10-year breakevens are 50 basis points below where they were in the first half of 2022, when the US Fed was jacking up rates.
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