Risk of sizeable decline on Indian rupee on the rise, analysts say

A customer hands Indian currency notes to an attendant at a fuel station in Mumbai

By Nimesh Vora

MUMBAI (Reuters) - The rupee inched up against the U.S. dollar on Monday, but surging oil prices and the rally on the dollar index suggest the rising risk of a significant decline in the local currency, analysts said.

The rupee was last at 83.1450 to the U.S. dollar, compared with 83.1850 in the previous session. The Reserve Bank of India has regularly intervened to make sure that the rupee does not fall below the 83.29 record low.

"The RBI will be there to defend the rupee and to make sure that volatility overall is contained," the foreign exchange sales head of a private sector bank said.

"But, you can't help but think that the probability of a new low has climbed," the executive said, pointing to oil prices and the dollar's rally.

Brent crude has rallied 8.5% this month and surged nearly 26% in the current quarter on worries over supplies.

Oil output cuts which Saudi Arabia and Russia have extended will mean a substantial market deficit through the fourth quarter of the current year, the International Energy Agency said last week.

Brent crude is at $94.60, hovering at the highest since Nov. 2022.

"Depreciation pressures on INR is expected to be higher in the near term with crude oil prices above $90 and dollar strength," Gaura Sen Gupta, economist at IDFC First Bank wrote in a note.

The dollar index, supported by expectations that the U.S. Federal Reserve will hold rates high for longer, is hovering at the highest since March.

Higher oil prices could widen India's oil trade deficit and impact the overall deficit. India's trade deficit in August widened to a 10-month high at $24.2 billion.

"This is an adverse terms-of-trade shock for Asia, since most Asian economies are net oil importers," Nomura said in a note on Friday.

"India, Thailand and the Philippines appear more vulnerable to higher oil prices."

(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)