The Indian rupee appreciated to its strongest level in two months, outperforming its Asian peers, as the central bank's dollar sales helped cushion the currency against the inflationary impact of rising oil prices. The currency advanced despite crude costs climbing, which fanned concerns over domestic price pressures and nudged bond prices marginally lower.

The dollar slipped 0.3% against the rupee to 94.9075, while Brent crude extended its rally for a second consecutive session, topping $91 per barrel. The renewed escalation in US-Iran tensions has clouded the outlook for energy shipments through the strategic Strait of Hormuz, adding a fresh layer of uncertainty to global supply chains.

Dilip Parmar, a foreign exchange analyst at HDFC Securities, noted that the rupee initially drew strength from the Reserve Bank of India's interventions in both offshore and onshore markets. However, importers have seized every dip in the USD/INR pair as an opportunity to stock up on dollars. The 95 level carries significant psychological weight for dollar buyers, with geopolitical risks and oil price volatility further amplifying its importance.

Overseas foreign currency deposit schemes have generated steady inflows, which, combined with the central bank's market operations, are underpinning the rupee. Meanwhile, India's 10-year government bond yield edged up one basis point to 6.96%. Economists led by Sameer Narang at ICICI Bank projected in a note that this yield is likely to oscillate within the 6.85-7.00% band in the near term, while traders keep a close watch on West Asian developments. The same report suggested that stronger-than-expected GDP data would raise the odds of earlier policy tightening by the central bank.

Market participants also anticipate that the Reserve Bank will roll out measures to absorb the surplus liquidity building up in the banking system, a byproduct of inflows from the special dollar deposit window. In the debt market, state government bond issuance reached 270 billion rupees (approximately $2.8 billion) on Tuesday, exceeding the amount outlined in the central bank's scheduled calendar. This oversupply could widen the spread between state bonds and central government securities.