Rupee hits fresh low amid surge in crude prices and West Asia tensions

The rupee hits a record low as crude oil prices surge amid West Asia tensions, raising concerns over inflation, import costs, and widening current account deficit

The Indian rupee fell to an intraday fresh low of 95.44 against the dollar on Tuesday, as the fragile ceasefire was on the brink, with Iran and the US trying to take control of the Strait of Hormuz — a key waterway for crude oil transportation — resulting in a spike in oil prices.

 

The local currency settled at a new closing low of 95.29 per dollar, against the previous close of 95.09 per dollar.

 

Brent crude prices surged close to $114 per barrel before retreating to $111 per barrel, raising concerns over India’s import bill and inflation outlook. The fall in the currency is also expected to widen the current account deficit and keep pressure on external balances.

 

 

“The rupee's fresh all-time low against the dollar, with onshore spot currently at 95.34, is a direct reflection of the unrelenting pressure from West Asia. Hormuz remains the single biggest factor governing oil and gas prices, and elevated crude is exerting a dual squeeze on the rupee,” said Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities.

 

India’s monthly energy import bill, which averaged $10 billion–$11 billion before the conflict, has risen 70 per cent–80 per cent. At the same time, foreign portfolio investor (FPI) outflows have reached around $21 billion since the tensions escalated. 

 

The rupee has depreciated by 5.68 per cent in the current calendar year so far, whereas it has weakened by 0.5 per cent in the current financial year.

 

“The combination is forcing the RBI to defend the currency aggressively in both spot and forwards, and it remains the only meaningful force standing between the rupee and a sharper depreciation. Yet despite that defence, the rupee continues to underperform its EM peers, which is why it now appears fundamentally undervalued on most measures,” Banerjee said.

 

The Real Effective Exchange Rate (REER) of the Indian rupee fell further to 92.72 in March, against 93.99 in February.

 

The REER adjusts the Nominal Effective Exchange Rate (NEER) to account for inflation differentials between India and its major trading partners. A REER value above 100 indicates an appreciation of the rupee relative to the base year, potentially making Indian exports less competitive in global markets.

 

Market participants said that as long as flows remain constrained, Brent can move towards $125 per barrel–$130 per barrel, which could push the rupee to 97 per dollar–97.50 per dollar. The rupee is likely to recover only when crude falls below $100 and capital flows turn supportive, they said.

 

Dilip Parmar, Senior Research Analyst at HDFC Securities, said the rupee’s fall reflects growing concerns over global inflation and external imbalances.

 

“The Indian rupee tumbled to a record low as escalating tensions in the Middle East and the ongoing Russia-Ukraine conflict fuelled concerns over a global inflation spike. This, along with rising crude oil prices, has increased fears of a widening balance of payments deficit,” he said, adding persistent capital outflows and a cautious approach by the central bank are adding to the pressure.