The Indian rupee surged against the dollar on Friday as growing expectations of a U.S.-Iran peace agreement sent oil prices sharply lower and triggered an unwinding of long dollar positions.
The rupee opened firmer at 95.32 per dollar but briefly slipped to a low of 95.52 in a volatile session, pressured by dollar demand from corporates and importers.
Reports of a possible peace deal between Washington and Tehran pushed oil prices deeper into the red, easing concerns over India's import bill and external balances.
The rupee climbed to a one-week high of 94.9550 during the session before settling at 95.11, up 0.7% on the day. The move, however, was not enough to protect the currency from posting its first weekly decline, after rising for the last three weeks.
"The Indian rupee clawed back Thursday's losses, buoyed by improving market sentiment as global crude prices eased and the dollar softened on hopes of a U.S.-Iran diplomatic breakthrough," said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
Brent crude plunged to $85.80 per barrel, its lowest in three months, after U.S. President Trump said a peace agreement could be signed as early as this weekend. If confirmed, the deal would mark the most significant diplomatic breakthrough yet to end the three-month-old war.
The sharp drop in oil prices prompted traders to trim long dollar positions built up during the recent bout of geopolitical stress, while improving risk appetite across emerging-market currencies.
The Reserve Bank of India has also announced a series of measures aimed at attracting dollar inflows, which have helped stabilise the currency after it hit all-time lows recently.
Kotak Mahindra Bank expects the measures to provide some room for appreciation as flows begin to materialize and expects the rupee to move towards 93.0-93.5 levels in the months ahead.
