The rupee opened little changed against the US dollar, even as Asian currencies declined after the Hamas attack on Israel.
At 9.10am, the home currency was trading at 83.23 to a dollar, down 0.01 percent from its previous close of 83.25.
Crude oil surged over 5 percent to $87 a barrel after the violence in the Middle East spurred worries about a supply shock.
IFA Global noted that if the conflict escalates, the RBI might face a choice similar to the early days of the Russia-Ukraine war. They would need to decide whether to continue depleting reserves to support the currency's value or allow it to adjust on its own.
Read: Oil jumps as Hamas’ attack on Israel fans Middle East tensions
"We have highlighted earlier that in case there is simultaneous, enduring stress on current as well as capital account, we may see the RBI become more tolerant of rupee depreciation. The reaction function would depend on the overall move in broader dollar as well," IFA Global said.
Analysts said If the conflict persists and crude prices remain high, the RBI might allow the rupee to adjust, even though it aims to smooth the transition.
If elevated crude prices persist, the RBI must consider the imported inflation resulting from rupee depreciation. This situation will challenge the RBI's ability to prioritise its objectives, including managing volatility, maintaining rupee competitiveness, prudent use of forex reserves for external stability, and addressing the inflationary impact of a weaker rupee, analysts said.
Read: Interview: RBI may cut repo rate from June 2024, says StanChart’s Anubhuti Sahay
Asian currencies were trading weaker. The Thai baht fell 0.51 percent, Philippines peso 0.41 percent, Indonesian rupiah 0.33 percent, Malaysian ringgit and Singapore dollar 0.17 percent each, while South Korean won fell 0.12 percent. Among gainers, China offshore and Japanese yen gained 0.12 percent each.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 106.31, up 0.27 percent from its previous close of 106.044.
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