The Indian rupee traded slightly weaker on Wednesday as renewed hostilities in the Middle East lifted oil prices and sapped risk sentiment, while traders pointed to modest portfolio inflows that helped limit downward pressure.
The rupee was at 95.16 as of 11:05 a.m. IST, down slightly from its close at 94.9675 in the previous session.
Iran said it had targeted U.S. military sites in Bahrain and Kuwait on Wednesday after the U.S. launched a wave of military strikes on Iran in response to attacks on tankers in the Strait of Hormuz.
The hostilities lifted oil prices by nearly 3%, while bond yields ticked higher and Asia Pacific stocks fell. India's benchmark equity index, the Nifty 50, declined by 0.5%.
Elevated oil prices present a risk to net energy importers like India and a sustained rise can lead to both slower growth and higher inflation.
"External pressures on Asia FX remain in the near term, although domestic fundamentals and central bank responses are likely to drive some divergent performances across the region," MUFG said in a note.
Regional central banks have taken efforts to support their respective currencies ranging from measures to draw capital flows in India to interest rate hikes in Indonesia and Philippines.
Meanwhile dollar sales by foreign banks, most likely on behalf of custodial clients, buffered some of the pressure on the rupee, traders said.
Alongside developments in the Middle East, investors are keeping an eye on evolving expectations of the U.S. Federal Reserve's rate path. Minutes of the central bank's June policy meeting are due later in the day.
Interest rate futures are currently pricing in about 34 bps of policy tightening by the Fed over the remainder of the year, per LSEG data.
