The Indian rupee slipped to its weakest level in more than a month on Monday, as oil prices rose after U.S. and Iran traded strikes, with Tehran saying it had closed the vital Strait of Hormuz.
The rupee closed at 95.62 per dollar, down 0.3% from its previous session close, after touching an intraday low of 95.85.
The currency's losses would have been steeper had it not been for the likely central bank intervention, traders said.
Brent crude rose 3% to $78 per barrel, keeping markets jittery over the impact of higher energy costs if the hostilities in the Gulf carry on.
Steep increases in oil can widen India's, the world's third-largest energy importer, current account deficit, slow growth, and lift inflation.
A key currency options market gauge of rupee depreciation risk - the 1-month 25-delta dollar-rupee risk reversal - drifted to 0.3 from nearly 0 at the start of the month.
A rise shows that demand for options betting on a weaker rupee has outpaced the appetite for wagers on a rise in the South Asian unit.
The rupee's "sensitivity to headlines will likely remain elevated in the near future and demand a more assertive market presence by the Reserve Bank of India to limit sharp moves," a trader at a state-run bank said.
Meanwhile, data released on Monday showed that India's merchandise trade deficit widened to $30.43 billion in June as exports fell faster than imports.
Investors now await the release of consumer inflation data later in the day, which is expected to show CPI rising above the central bank's 4% medium-term target for the first time in 16 months, according to a Reuters poll.
Elevated inflation could pressure the central bank to hike interest rates, with Goldman Sachs analysts expecting the Reserve Bank of India to hike rates by 25 basis points each in October and December, while swap markets are pricing in a similar amount of rate increases over the next 12 months.
