USD/CNY from Swissquote — TradingView

Indonesia’s central bank is currently adopting the region’s most stringent monetary policy after unexpectedly raising interest rates, while the South Korean market is gradually giving up on the scenario of rapid interest rate cuts, although it remains at 2.50%.

In China, Beijing continues to implement policies to support economic growth while avoiding disorderly depreciation of the yuan. In addition to oil, the market is also focused on transportation costs, marine insurance and tensions in refined products and fertilizers.
But the moment of rebound will come, most likely when maritime traffic in the Strait of Hormuz begins to resume normal activity. As for the Indian Rupee (INR), the central bank will do whatever it can to prevent its depreciation.

The table below shows the most important Asian emerging currencies that are under pressure due to the geopolitical situation. Only the yuan remains on an upward trend.

The Indian rupee is currently one of the Asian currencies most vulnerable to geopolitical tensions in the Middle East. India relies heavily on energy, especially crude oil, imported indirectly through the Strait of Hormuz, while rising shipping and insurance costs are gradually worsening the current account balance. This energy dependence explains why the USD/INR currency pair is closely monitored by India’s central bank, the Reserve Bank of India (RBI).

The RBI is absolutely unwilling to permanently lose confidence in the rupee. The central bank has intervened in FX markets several times in recent weeks to slow USD/INR appreciation. The market now understands that USD/INR 100 is an important psychological level. Above this level, there are risks of accelerated capital outflows, rising imported inflation and loss of currency credibility.

This is also the reason why the Reserve Bank of India has gradually adopted a tougher tone. Although official interest rates remained at 5.25%, markets began to price in the possibility that monetary policy could shift to a stricter stance if energy tensions persist. India’s central bank is likely to accept tighter fiscal conditions to defend its currency and limit the inflationary impact of rising commodity prices.

Another important factor is the timing of the current shock. Tensions over oil, liquefied natural gas, refined products and even fertilizers are directly linked to shipping disruptions in the Strait of Hormuz. Historically, emerging Asian currencies have tended to start rebounding before trade flows fully resume once markets anticipate improvements in logistics conditions.

The chart below shows monthly and daily candlesticks for the USD/INR exchange rate.

This is the scenario the RBI is trying to frame: to prevent short-term panic in the rupee in order to set the stage for a future rebound in the rupee when energy tensions stabilize. If maritime transport continues to return to normal in the coming weeks and oil prices stop rising, the Indian rupee may become attractive again against the US dollar.

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