Key Takeaways:
The Indian rupee is poised to breach the 95.50 level against the dollar as renewed US-Iran hostilities compound persistent dollar demand from equity outflows and importer payments.
The rupee is expected to open Wednesday in the 95.40 to 95.44 per dollar range, traders said, after settling at 95.35 on Tuesday. The currency has lost nearly all the ground it gained after the Reserve Bank of India rolled out measures to attract inflows on Friday, trading just 0.2 percent above its pre-announcement level.
"The RBI measures have re-based the USD/INR range lower, with talk of room for a fall to the 93 to 94 level," a currency trader at a bank said. "However, oil, hedging and equity outflows remain overhangs for the rupee."
Foreign investors have offloaded more than $6 billion of Indian equities so far this month, surpassing the total outflows recorded in all of May. The selling pressure comes as Asian equities extended losses alongside US equity futures, while most regional currencies weakened. Brent crude futures rose 2 percent to $93.90 a barrel on Tuesday before easing, as the escalation in the Middle East eroded optimism that the months-long conflict might ease.
The US carried out strikes on Iran after President Donald Trump said Tehran had downed a US helicopter in the Strait of Hormuz, adding to unease around an already fragile ceasefire. The strait handles about 21 percent of global oil trade, and India imports more than 85 percent of its crude oil requirements, making it acutely vulnerable to supply disruptions.
Oil Shock Amplifies Rupee Weakness
The latest escalation builds on a crisis that has already inflicted severe damage on India's external accounts. Brent crude surged from $71 a barrel in February to $127 in March — the biggest monthly gain since 1988 — after US-Israeli strikes on Iran closed the Strait of Hormuz. Every $10 increase in oil prices widens India's current account deficit by about $12 billion to $15 billion annually, economists estimate.
The rupee has slid from 90.85 per dollar in February to 95.39 in May, its weakest level ever. India's foreign exchange reserves fell by $47 billion over the same period, from a peak of $728.5 billion to $681.38 billion, as the central bank burned dollars to defend the currency. The RBI launched a $5 billion dollar-rupee swap auction in May that drew bids worth nearly $9.8 billion, signaling persistent demand for dollars.
Rate Outlook Adds to Headwinds
US May inflation data due later Wednesday comes against a backdrop of expectations that the Federal Reserve will raise rates this year. Markets are now fully pricing in a 25-basis-point hike in December, a sharp reversal from pre-conflict expectations of two rate cuts. Higher US rates would further pressure emerging-market currencies by widening interest rate differentials.
India's current account recorded a surprise surplus of $7.1 billion in the fourth quarter of the fiscal year, or 0.7 percent of GDP, supported by a strong services trade surplus. But for the full fiscal year, the deficit stood at $25.2 billion, or 0.6 percent of GDP, and the oil shock is expected to widen it further in the current year.
The last time India faced a similar oil-driven currency crisis was in 2013, when the rupee fell to a then-record 68.85 per dollar and the RBI launched special FCNR-B deposit schemes and NRI bond swaps to stem the slide. Those measures drew about $34 billion in inflows. This time, the RBI's swap facility and relaxed overseas borrowing rules could attract $50 billion to $70 billion, according to Jefferies, but the scale of outflows and oil price shock is also larger.
This article is for informational purposes only and does not constitute investment advice.
