MUMBAI, May 26 (Reuters) - The Indian rupee slipped on Tuesday as crude oil prices rebounded on waning optimism about the chances of an imminent U.S.-Iran peace deal.
The rupee dipped nearly 0.5% to end at 95.68 per dollar, snapping a three-session winning streak. The drop was smoothened by dollar sales from state-run banks, most likely on behalf of the Reserve Bank of India.
Asian currencies were mostly weaker as well, with the rupee's oil-sensitive peers the Indonesian rupiah and Philippine peso down about 0.2% and 0.5%, respectively, as Brent crude futures rose more than 3% to nearly $100 per barrel.
Indian equities fell and bond yields rose as investors took in news of fresh U.S. military strikes on Iran and after U.S. Secretary of State Marco Rubio said that negotiating a peace deal could "take a few days."
Until both sides formally announce a deal, investors will likely trade cautiously, given the inflationary pressures that are building, analysts at MUFG said in a note.
The risk of higher inflation has prompted analysts at MUFG, ANZ and Standard Chartered to pencil in a rate hike by the Reserve Bank of India at its upcoming policy meeting on June 5.
On the day, India's 10-year bond yield was slightly higher at 7.038% while the 1-year overnight index swap rate, a gauge of market expectations on central bank policy, rose 3 bps to 6.19% - signalling that traders are pricing in nearly 100 bps of rate hikes over the next 12 months.
Consensus economist expectations, though, are for the central bank to keep policy rates unchanged.
The RBI has also been considering measures to shore up dollar inflows and banks have sought subsidised forex hedging costs from the Reserve Bank of India to raise overseas borrowings, Reuters reported earlier.
Meanwhile, the RBI's three-year dollar/rupee buy-sell swap drew strong demand on Tuesday. Far tenor dollar-rupee forward premiums fell after the auction results were announced.
Reporting by Jaspreet Kalra; Editing by Rashmi Aich, Eileen Soreng and Ronojoy Mazumdar
Source: Reuters