Oil woes, capital outflows drag rupee to record low

MUMBAI: The Indian rupee fell to a record low on Wednesday, extending a rough patch as the raging conflict in the Middle East kept oil prices elevated, sparking capital outflows and raising macroeconomic risks for Asia’s third-largest economy.

The rupee closed at 92.63 per dollar, eclipsing its previous lifetime low of 92.4750 hit last week.

The currency has declined more than 1.5% since the Iran war began amid nearly $8 billion of foreign portfolio outflows from local stocks. Frequent interventions by the central bank, including on Wednesday, have been curbing the fall in the rupee, traders said.

Brent crude has climbed about 40% since the Middle East war broke out and a sustained rise could widen India’s current account deficit and fuel inflation, leaving the rupee more exposed than many of its peers.

India imports over 80% of its energy needs and the conflict threatens to curb remittances from the diaspora and hurt exports to the region.

Also read: Indian rupee stays on defensive with traders glued to oil moves

With oil around $100 per barrel, the pressure on the rupee will likely continue until tensions ease, Dhiraj Nim, an economist and FX strategist at ANZ, said.

“The RBI will be able to defend against speculation, but insofar as high oil prices will weaken the balance of payments, the RBI may not be adamant to hold the INR.”

Demand for dollars at the daily reference rate and a pick-up in importer hedging once the 92.50 level was breached also hurt the rupee.

Heightened vulnerability

Risks from the conflict, which shows no signs of ebbing, have prompted banks to pitch cross-currency trades targeting the rupee’s underperformance against Asian peers such as the Chinese yuan and Singaporean dollar.

Data from the options market points to a surge in trades that bet on further near-term weakness.

Analysts expect the yuan and Singapore’s dollar to outperform peers while the rupee and the Thai baht lag while the conflict lasts. Persistently high energy prices could push the currency beyond 95 per dollar, according to analysts.

Investors now await the U.S. Federal Reserve’s policy decision later in the day. With no change expected, all eyes will be on the assessment of the impact that the war will have on growth and inflation.

India’s FX and debt markets will be closed for a local holiday on Thursday. Equity markets will be open.