Indian rupee likely to weaken more on widening India-Pakistan conflict

MUMBAI: The Indian rupee looks set to decline further on Friday, pressured by the widening conflict between India and Pakistan that may trigger increase hedging and speculative activity.

The 1-month non-deliverable forward indicated that the rupee will open at 85.80 to 85.90 to the U.S. dollar compared with 85.71 in the previous session.

The rupee on Wednesday slumped 1.04%, recording its worst session in more than two years.

The currency came under pressure in the afternoon session after India reported Pakistan’s attempts to engage military targets.

“Until yesterday afternoon, markets had largely priced in a view that there would be no meaningful worsening in India-Pakistan tensions,” a currency trader at a Mumbai-based bank said.

“That assumption is now being reassessed, and positioning in the rupee will likely need to be adjusted accordingly,” and it may lead to a pick-up in hedging and speculative activity, the trader said.

Pakistan and India accused each other of launching drone attacks on Thursday, and Islamabad’s Defense Minister said further retaliation was “increasingly certain”.

India said military stations were attacked by Pakistani drones and missiles.

Indian equities were set to open more than 1% lower. In the two sessions following the rise in tensions, the activity of foreign investors indicates that they largely held the view that the situation would not have a lasting impact on the Indian economy, analysts said.

Indian rupee, shares, bonds drop on signs of escalation in India-Pakistan conflict

Preliminary data showed that foreign investors were net buyers of Indian equities on Thursday, after buying approximately $350 million on Wednesday.

“It will be interesting to see how the numbers pan out in today’s session. There’s a sense that the landscape has shifted,” said Kunal Kurani, Assistant Vice President at Mecklai Financial.

Other Asian currencies largely weakened on Friday, while the U.S. dollar rose against its major counterparts, creating additional headwinds for the rupee.