INDIA RUPEE-Flight to safety, rising oil put rupee’s recovery to the test

By Nimesh Vora

MUMBAI, Oct 23 (Reuters) - The Indian rupee’s recent recovery is likely to face headwinds on Friday from a flight to safety that's weighing on risk-sensitive currencies and rising oil prices which threaten to spur increased hedging by importers.

The rupee is expected to open at 94.84-94.88 per dollar, according to traders, after settling at 94.8175 on Thursday. It had climbed to a more than six-week high near 94.30 in the previous session before reversing course.

Bankers were surprised by both the speed of the reversal and its divergence from the broader trend. The move adds another layer of uncertainty for the rupee, which faces mounting pressure from a flight to safety and relentlessly rising oil prices, they said.

Safe-haven asset US Treasuries and the Japanese yen rallied while US equities suffered a selloff on doubts over the AI outlook. The 10-year US Treasury yield fell back below 5% despite rising crude prices.

The 10-year US yield is down 40 basis points from its recent peak, notable in the context of concerns about a slowdown in AI spending and its implications for economic growth overshadowing economic data that points to persistent inflationary pressures.

Oil prices climbed on concerns about further supply disruptions after Houthi attacks on top exporter Saudi Arabia. Brent crude rose to just shy of $115 a barrel.

"It looks like markets are going through a subtle regime shift. Higher energy prices no longer mean higher rates forever; instead, the long end is starting to express a little more fear about growth," ING Bank said in a note.

"It looks like there is some defensive rotation underway."