The Indian rupee sank to an all-time low on Wednesday as escalating tensions in the Middle East sent crude oil prices higher, raising fears of rising inflation, a widening trade deficit and capital outflows from emerging markets.
The currency fell past the psychologically important level of $92 for the first time, falling as much as 0.8% to 92.30 against the US dollar. This decline surpassed the previous record low of 91.9875 set earlier this year.
The sharp decline came as global markets turned risk-off amid the growing conflict between the United States, Israel and Iran, raising fears of energy supply disruptions.
path Live updates about the war between Iran and the US here
The oil shock shakes the markets
The biggest reason for the depreciation of the rupee was the rise in crude oil prices. Brent crude rose above $82 a barrel after jumping nearly 12-13% in just two days – the biggest rise since 2020 – as traders worried about war-related supply disruptions.
For India, which imports more than 80% of its crude oil needs, the rise in oil prices leads to a significant rise in the country’s import bill. This leads to a widening of the current account deficit and puts pressure on the local currency.
Economists estimate that every $1 increase in crude oil prices leads to an increase in India’s import bill by approximately one dollar $16,000 crore, making the rupee particularly sensitive to oil price shocks.
“Rising crude oil poses an immediate risk to the rupee – we expect a slightly stronger intervention from the RBI, but if oil prices remain high, we may have to tolerate a weaker rupee,” Dheeraj Nim, forex strategist at Australia & New Zealand Banking Group Limited, told Bloomberg.
Government on the impact of the US-Iran war
The Indian government warned on Tuesday that any major disturbance in the Gulf region could have serious economic consequences for the country’s economy.
India is deeply concerned about the growing conflict resulting from the US-Israeli strikes on Iran and Tehran’s subsequent retaliation, the Ministry of External Affairs said in a statement on Tuesday. The government stressed that the Gulf region is important 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 agency said, noting that India’s trade and energy supply chains pass through the region.
Will the Reserve Bank of India intervene to stabilize the currency?
The Reserve Bank of India is believed to have intervened to support the currency after it breached the 92 per dollar level, as it reportedly sold dollars in the market to slow the rupee’s decline.
However, analysts warn that continued pressure from rising oil prices could push the currency further weak. Some Forex strategists expect the rupee to test the 93 per dollar level sooner than previously expected if geopolitical tensions persist.
Foreign investors are declining
Global investors have also started withdrawing their money from Indian markets amid growing uncertainty. Foreign institutional investors have resumed selling shares, with net inflows amounting to thousands of crore rupees in recent weeks.
A weak currency itself could accelerate these outflows, eroding returns for foreign investors and raising concerns about corporate profitability due to higher import costs.
Markets decline as risk appetite increases
The rupee’s decline coincided with widespread selling in Indian financial markets. Benchmark Sensex fell nearly 1,800 points in intraday trade, while the Nifty 50 index fell over 550 points as investors dumped risky assets.
The total market value of companies listed on the stock exchange decreased by about $12 thousand crores during the session. On the other hand, the Indian volatility index VIX jumped by more than 20%, which reflects the growing nervousness among investors.
Bond markets also reacted to the oil shock, with the yield on 10-year Indian government bonds rising to around 6.72%, complicating the central bank’s efforts to keep borrowing costs stable.
Inflation and future growth risks
The rise in oil prices threatens to renew inflationary pressures at a time when price growth has begun to stabilize in recent months. High fuel costs can impact the economy, leading to higher transportation and production costs.
Analysts say a prolonged conflict in the Middle East could disrupt remittances from Indians working in Gulf countries and impair capital flows into the country.
If the crisis persists, economists warn it could widen India’s current account deficit, accelerate the rupee’s depreciation and put pressure on economic growth.
