The Indian rupee declined to its weakest level in two months on Monday as oil prices continued to press higher amid sustained hostilities in the Middle East, while dollar sales from state-run banks blunted the pressure.
The rupee fell 0.2% from its closing level on Friday to 96.4575 per dollar, its lowest since May 21 and inching near its all-time low of 96.96 hit in the same month.
Brent crude futures rose 2.5% to $90.3 a barrel in Asian trading after the U.S. said on Sunday it had begun a ninth straight night of attacks against Iran after earlier disclosing at least two U.S. military personnel were killed in Jordan.
The strikes are part of an escalating cycle of attacks between the U.S. and Iran after the unraveling of last month's interim ceasefire agreement.
"More attacks on tankers and Middle East infrastructure could push prices back to the $100+ range that prevailed for much of the hot phase of the conflict," analysts at Goldman Sachs said in a note.
Elevated crude prices can expose India to macroeconomic turbulence as the country imports about 90% of its oil needs.
In addition to stressing the current account, a rise in energy import costs also tends to dampen foreign portfolio flows into the country as bonds face the risk of higher inflation while equities are dented by the prospects of slower growth.
On the day, India's benchmark equity index Nifty 50 was down 0.5% while the yield on the 10-year sovereign bond rose 3 basis points.
The rupee, meanwhile, saw its drop blunted by dollar sales from state-run banks, traders said, in a pattern similar to price action observed in recent trading sessions wherein mild interventions by the Reserve Bank of India averted a sharp slide in the currency.
