Rupee to rally after US midterm fallout sinks oil on Iran war-exit hopes
The Indian rupee is poised to climb at the open on Thursday after oil prices tumbled on bets that the Republican Party's losses in the US midterm elections could push President Donald Trump towards an exit from the Iran war.
The rupee is expected to open in the 94.35-94.40 range, per traders, having settled at 94.64 to the dollar on Wednesday. Brent crude tumbled about 8.5% to well below $100 after President Donald Trump's Republican Party lost control of Congress in midterm elections. Brent was at $94.20 in Asia, down almost 20% this week.
The Democratic Party's decisive victory will mean they will be "more confident" about pushing back against Trump's policies on Iran, support of Israel and any escalation of tariffs, analysts at ING Bank said in a note.
MUFG Bank said that the US midterm election "represents a meaningful shift" in the political landscape and will trigger an unwind of part of the political and geopolitical risk premium embedded in markets.
Crude prices had built up a sizeable geopolitical risk premium over the more than eight months of conflict with Iran, amid repeated military escalations, disruptions to oil flows and uncertainty over the Strait of Hormuz.
With no clear end to the conflict in sight and negotiations repeatedly failing to produce a breakthrough, investors had priced in the possibility that disruptions could persist.
The slump in crude prices suggests investors are betting that the political setback could push Trump toward a negotiated exit.
A sustained decline in oil prices is expected to materially alter the rupee's outlook. Besides alleviating the direct pressure on the currency by lowering India's dollar requirements for oil imports, it would improve the country's growth and inflation outlook, potentially making Indian assets more attractive to foreign portfolio investors.
The sustainability of the rupee's ongoing recovery has remained in question due to concerns about oil, a currency trader at a bank said.
"A meaningful and sustained correction in crude could change that equation."
