The Indian currency rose sharply on Wednesday, trading at ₹92.62 per US dollar from 93.0075 on Tuesday amid positive developments over tensions in the Middle East. The most important reason behind this development is the two-week ceasefire agreement reached between the US and Iran just in time ahead of a crucial US deadline. As a result, there has been a 14% decline in the price of Brent crude oil.
Moreover, this swift rush into peace brought an instant calming effect on global markets, as they expected a shutdown of the vital Strait of Hormuz, through which Asia receives its oil shipments. This reduced ‘market fear’ significantly: volatility expectations fell to 8% from 12%, while the cost of protecting the dollar (the forward premium) declined sharply. The resultant ‘risk appetite’ led to an impressive equity rally with Indian shares climbing 3.6% and US futures advancing by 2.5%.
It is at a crucial juncture, as the RBI prepares to release its new policy stance. While the fall in oil prices helps reduce inflationary pressures, experts believe the RBI will maintain its interest rates to avoid future instability following weeks of volatility. In essence, the cessation of hostilities helped avert an economic disaster for the region, enabling the rupee and other Asian currencies to catch their breath.
