Indian rupee drops to one-month low as escalating Middle East war keeps traders on edge

MUMBAI: The Indian rupee fell to its weakest in a month, while the cost of hedging against further depreciation against the dollar rose, as the escalating military conflict in the Middle East kept financial markets across the globe on edge.

The Reserve Bank of India likely stepped into the market, traders said, while dollar sales by foreign banks also helped curb losses in the Indian rupee, which fell 0.5% to close at 91.47 per dollar in its steepest drop in more than a month.

Stocks in Asia and Europe retreated, with MSCI’s gauge of Asia-Pacific shares down over 1.5% and India’s benchmark Nifty 50 index down by a similar amount, while equity futures pointed to steep drops for stocks on Wall Street as well.

For energy-importers such as India, the near 10% surge in crude oil prices to $80 per barrel as container ships cluster on either side of key chokepoint the Strait of Hormuz is the immediate economic threat.

“There is no sign of an obvious off-ramp for the war,” said Jane Foley, senior FX strategist at Rabobank in a Monday note.

“The outlook for oil and safe haven assets will ultimately be determined by the length and impact of this conflict.”

Dollar-Indian rupee forward premiums, which reflect the cost of hedging against further Indian rupee weakness, jumped on Monday with the 1-year implied yield climbing as much as 13 bps to 2.80%.

Asian currencies fell between 0.3% to 1.3%, while the dollar index was up 0.3% at 98.4.

Avoiding overnight risk

Traders in India’s foreign exchange market struck a cautious note on initiating speculative wagers on the Indian rupee, given the heightened risk of overnight developments that could squeeze such positions.

The focus is on “just managing risk and not taking any additional exposures,” a trader at a large foreign bank said, considering as well that Tuesday is a local holiday that will keep financial markets in India shut.

Another trader stressed that while the local currency appears set for further depreciation, the Reserve Bank of India could intervene as the Indian rupee edges closer to its record low of 91.9875 per dollar.