The Indian rupee slipped to its weakest level in nearly two weeks on Tuesday as oil prices jumped on fading hopes for a U.S.-Iran deal to end the war and reopen the Strait of Hormuz.
Likely dollar selling intervention by the Reserve Bank of India, though, helped limit the currency's losses, traders said.
Wedged between the competing forces, the currency closed out the day's session at 95.4350 per dollar, down 0.15% from its previous close.
The worries also dented equities, with the Nifty 50 down 0.5% and the benchmark 10-year bond sliding, pushing its yield 3 basis points higher.
India is seen as particularly vulnerable to ructions in oil prices as it imports nearly 90% of its crude requirements. Brent crude oil futures were last up nearly 2.5% to $89.9 per barrel.
"The absence of large outflows or derivative maturities was helpful to the rupee on the day but if oil keeps rising, expect it hover around 95.80 soon, unless the RBI stands firmly in the way," a trader at a private bank said.
The central bank's frequent interventions over recent sessions have kept volatility expectations on the dollar-rupee pair in check, despite renewed worries about conflict in the Middle East.
The dollar-rupee's 1-month implied volatility, a gauge of future expectations, fell to 4.6% on Tuesday, its lowest level since late June. Traders reckon this reflects market expectations that the central bank will not allow sharp moves.
In addition to developments in the Middle East, focus this week is on consumer inflation data for India and the U.S., both due on Wednesday.
"If Brent crude prices stabilise around $70-100 per barrel, it reduces the geopolitical tail risks around the U.S.-Iran conflict and keeps the FX market highly data-dependent," analysts at DBS said in a note.
