Mumbai: The rupee is headed into a crucial week, trading close to its record low and within sight of the psychologically important 97-per-dollar level, as elevated oil prices and geopolitical risks threaten to put fresh pressure on the currency.

Rupee closed at 96.56 on Friday, close to its all-time low of 96.96 hit in late May. Traders said the RBI has been defending the 96.55-96.60 zone aggressively, but a further rise in oil prices or any fresh negative geopolitical development could test how far, and at what level, it is prepared to intervene.

Traders are also tracking debt inflows and the pace of inflows under the FCNR(B) deposit scheme. The expectation of continued foreign currency inflows is another reason, apart from oil prices, why traders have kept their positioning relatively light.

"The response to the FCNR(B) scheme has been good, and the inflows from it are helping us manage the rupee around the 96.50 levels. The market knows these inflows are coming, so there isn't the kind of panic we saw in April and May," said Alok Singh, head of treasury at CSB Bank. Banks have collectively raised $20.7 billion until July 17 under the special incentive window for FCNR(B) and external commercial borrowing swap schemes to attract foreign capital and support the rupee.

The rupee has weakened 6.8% so far this calendar year. In June, the currency pared some of its losses after the US and Iran reached a peace deal, bringing its year-to-date decline to around 4.6%. However, with hostilities in West Asia flaring up again, those gains have been erased and the rupee's weakness has widened once more.

Also Read: Why gold is showing signs of reversal after recent selling pressure

Oil prices are now dictating how aggressively traders position themselves against the rupee. Though the quantity of imports declined, India's import bill increased in the first quarter of fiscal 2027 owing to high oil prices. June alone saw the crude oil import bill surging by 47% YoY to $14.6 billion. The average price of the Indian crude basket climbed to $85.47 per barrel from $69.77 a year earlier, significantly increasing the country's import expenditure, according to a July 24 SBI report.