The Indian rupee plunged to an all-time low on Wednesday as escalating tensions in the Middle East sent crude oil prices soaring, sparking fears of higher inflation, a widening trade deficit and capital outflows from emerging markets.
The currency weakened past the psychologically important 92-per-dollar mark for the first time, falling as much as 0.8% to 92.30 against the US dollar. The drop eclipsed its previous record low of 91.9875 hit earlier this year.
The sharp decline came as global markets turned risk-averse amid the intensifying conflict involving the United States, Israel and Iran, which has raised fears of disruptions to energy supplies.
Oil shock rattles markets
TL;DR: For India, which imports more than 80% of its crude oil requirements, rising oil prices significantly increase the country’s import bill.
For India, which imports more than 80% of its crude oil requirements, rising oil prices significantly increase the country’s import bill. This widens the current account deficit and puts pressure on the domestic currency.
Economists estimate that every $1 increase in crude oil prices raises India’s import bill by roughly ₹16,000 crore, making the rupee particularly sensitive to oil price shocks.
“Higher crude is a direct risk to rupee — we expect slightly heavier RBI intervention but if oil prices remain high, we may have to tolerate a weaker rupee,” Dhiraj Nim, forex strategist at Australia & New Zealand Banking Group Ltd told Bloomberg.
Govt on impact of US-Iran war
TL;DR: On Tuesday, the Indian government had warned that any major disruption in the Gulf region could have serious economic consequences for the country's economy.
On Tuesday, the Indian government had warned that any major disruption in the Gulf region could have serious economic consequences for the country's economy.
In a statement on Tuesday, the Ministry of External Affairs (MEA) said India was deeply concerned about the growing conflict triggered by US–Israel strikes on Iran and Tehran’s subsequent retaliation. The government stressed that the Gulf region is crucial for India’s trade routes, energy supplies and the livelihoods of millions of Indians working there.
“Any major disruption has serious consequences for the Indian economy,” the MEA said, noting that India’s trade and energy supply chains pass through the region.
RBI steps in to stabilise currency?
TL;DR: The Reserve Bank of India is believed to have stepped in to support the currency after it breached the 92-per-dollar level, reportedly selling dollars in the market to slow the rupee’s fall.
The Reserve Bank of India is believed to have stepped in to support the currency after it breached the 92-per-dollar level, reportedly selling dollars in the market to slow the rupee’s fall.
However, analysts warn that sustained pressure from high oil prices could push the currency even weaker. Some forex strategists expect the rupee to test the 93-per-dollar level sooner than previously anticipated if geopolitical tensions persist.
Foreign investors pull back
TL;DR: Global investors have also begun pulling money out of Indian markets amid rising uncertainty.
Global investors have also begun pulling money out of Indian markets amid rising uncertainty. Foreign institutional investors have resumed selling equities, with net outflows of thousands of crores in recent weeks.
The weakening currency itself can accelerate these outflows, as it erodes returns for foreign investors and raises concerns about corporate profitability due to higher import costs.
Markets slump as risk sentiment worsens
TL;DR: The rupee’s slide coincided with a broader sell-off in Indian financial markets.
The rupee’s slide coincided with a broader sell-off in Indian financial markets. The benchmark Sensex fell nearly 1,800 points in intraday trade, while the Nifty 50 dropped over 550 points as investors dumped risk assets.
Overall market capitalisation of BSE-listed firms fell by about ₹12 lakh crore during the session. Meanwhile, India VIX, the volatility index, jumped over 20%, reflecting heightened nervousness among investors.
Bond markets also reacted to the oil shock, with the yield on India’s 10-year government bond rising to around 6.72%, complicating the central bank’s efforts to keep borrowing costs stable.
Inflation and growth risks ahead
TL;DR: Analysts say a prolonged conflict in the Middle East could also disrupt remittances from Indians working in Gulf countries and weaken capital flows into the country.
Analysts say a prolonged conflict in the Middle East could also disrupt remittances from Indians working in Gulf countries and weaken capital flows into the country.
If the crisis drags on, economists warn it could widen India’s current account deficit, accelerate rupee depreciation and weigh on economic growth.
Curated by Aisha Patel
