US-Iran tensions send oil prices soaring, rupee may have a tough year ahead

The rupee crossed 72 a dollar intraday, taking cues from the equity markets, but it clawed back later in the day as exporters stepped in to sell dollars.

The Reserve Bank of India (RBI) did not intervene in the market, said currency dealers.

The rupee closed at 71.94 a dollar, down from its previous close of 71.80 a dollar, as the crude oil price crossed $70 a barrel. On Friday, after the US killed a top Iranian general, the rupee had depreciated 0.61 per cent against the dollar.

The currency market believes that the Iran-US face-off may not escalate into a full-fledged war, but there will be tensions for quite some time and coupled with trade tensions with China, the year may not be that great for the rupee.

“Any war in addition to the trade war will be significantly worse for the global markets and risk sentiments. The rupee will be more affected than other emerging markets currencies because of India’s oil dependencies and also because India shared a good trade relationship with Iran. This factor puts an immediate bias for risk-off, including rupee depreciation and equity softening,” said Samir Lodha, managing director at QuantArt Markets Solutions, adding that investors are moving to safe haven currencies like Japanese Yen and investment in 10 year US bonds is seeing increased buying.

The dollar index, which measures the greenback’s strength against major currencies, fell 0.22 per cent to 96.63.

If there is no war, then 72.50 a dollar could be a good resistance level for the rupee, said a senior currency dealer with a foreign bank. “But if it escalates to war and crude oil is impacted, then there is no telling where rupee could go,” he said.

The currency dealer is now pencilling in the price of crude oil in their equations. The Union Budget had estimated the crude price at $65 a barrel. If the crude oil rises beyond that, India’s fiscal deficit widens because of increased import cost.

“If crude oil sustains above $70 a barrel, the rupee will be under a lot of pressure. It is all dependent on how oil would react,” said Ritesh Bhansali, vice-president at Mecklai Financial.

Analysts expect the renewed geopolitical worries to remain for a couple of days, lending support to the crude oil price and taking a toll on emerging market currencies, including the rupee. But there are mitigating factors in favour of the rupee.

“We expect the spot to rally towards 72.25 and 72.50, only to fall to 71.50. As we proceed towards the end of the month, we can expect dollar flows related to SBI Card IPO keeping a check on the rupee fall,” said Rahul Gupta, head of research- currency, Emkay Global Financial Services.