Rupee slides to two-month low of 96.31 to the dollar as bond rout and oil surge deepen pressure

The Indian rupee dropped to its weakest level in two months on Thursday, falling past the psychologically important 96-per-dollar mark as a global bond rout and surging oil prices deepened pressure on the currency.

The rupee ended down 0.5% at 96.3150 per dollar — its sharpest single-day fall in more than two months — after breaching the 96 barrier. Dollar sales by state-run banks limited the decline; without that intervention, traders said, the fall would have been deeper.

Borrowing costs from the United States to France, Britain and Japan hit their highest in decades on Thursday, squeezing already pressured government finances. The 10-year US Treasury yield, the global yardstick for borrowing costs and asset prices, rose to 5.34% — its highest since 2002 — as rising oil prices fuelled fears of stickier inflation and further US Federal Reserve rate hikes.

Brent crude oil prices reclaimed the $100-per-barrel mark after China suspended oil product exports, tightening fuel markets already strained by supply shortages. India imports nearly 90% of its crude requirements, so costlier oil directly worsens the trade balance and stokes fears of imported inflation.

The pressure is multi-front: Mumbai stocks fell about 1%, the yield on India's 10-year benchmark bond rose to its highest in over two years, and foreign investors have been pulling money out of Indian equities through September. Exporters remain reticent about hedging their receivables, while importer hedging stays robust, worsening the demand-supply mismatch in the foreign exchange market.

"Supply disruptions, volatile energy prices and global uncertainty could pose near-term risks to inflation, the rupee and capital flows," the government said in a report on Thursday. Traders expect the Reserve Bank of India to keep intervening to defend the 96 level.