On Tuesday, the Indian rupee reached its lowest value in history, primarily due to concerns over sustained high crude oil prices, ongoing capital outflows, and a decline in market sentiment.
The currency began trading at 95.50 against the U.S. dollar, breaching its previous record low of 95.4325 established the prior week. The rupee’s decline continued, hitting 95.6250, marking a 5.2% loss since the onset of the conflict in Iran. In response, the central bank intervened to stabilize the currency.
The rupee, along with other currencies from oil-importing nations, has faced significant pressure following a 46% increase in Brent crude prices linked to the ongoing Iran war. The Philippine peso and the Indonesian rupiah have also experienced considerable depreciation.
So far this year, the rupee has depreciated by 6.5%, making it the poorest performing currency among its Asian counterparts.
The conflict between the U.S. and Iran, which has persisted for approximately two and a half months, shows no signs of resolution, despite a fragile ceasefire that has been in effect since April 8. U.S. President Donald Trump remarked on Monday that the truce was “on life support,” highlighting disagreements regarding Iran’s key demands.
Analysts indicate that the prolonged nature of the conflict is likely to keep oil prices elevated, which will continue to exert pressure on the rupee. Rising oil prices are expected to exacerbate India’s current account deficit, particularly as weak capital inflows are anticipated to persist.
Since the beginning of the conflict, foreign investors have withdrawn over $20 billion from Indian stocks, with outflows in 2023 surpassing last year’s total. Preliminary data shows that nearly $900 million was sold by overseas investors on Monday alone.
According to ANZ Bank, the combination of capital flow issues and a widening current account deficit suggests a continued weakening of the rupee and a decline in foreign exchange reserves. The energy price surge has hit India during a period of cyclical recovery in both growth and inflation.
This fiscal year, India is projected to face its third consecutive balance of payments deficit, leading economists to downgrade growth forecasts, raise inflation predictions, and adjust their rupee outlook downward. ANZ recently revised its December rupee target from 93 to 97.5, while BMI, a division of Fitch Ratings, warned that the currency could potentially fall to 100 if the situation in Iran deteriorates further.
In light of the ongoing challenges facing the rupee, there are increasing expectations that policymakers may take action to support the currency, similar to measures implemented during the taper tantrum of 2013. Prime Minister Narendra Modi has called for restrictions on fuel consumption, travel, and imports to preserve foreign exchange reserves.
Modi’s appeal for citizens to conserve foreign exchange indicates a potential reluctance to adopt policies that might worsen current account and fiscal deficits, as noted by Nomura in a recent report. Possible actions could include discouraging non-essential imports like gold, tightening regulations on outward remittances, implementing a foreign currency deposit mobilization scheme, and increasing domestic fuel prices.
