Rupee Hits Fresh Lows: Know What Is Triggering The Fall

The Indian rupee slumped to record lows against the US dollar again, maintaining the title of being Asia’s worst-performing currency. A prolonged Iran war added to the sharply rising oil prices, which have led to the rupee’s downward spiral, which experts are of the opinion may not subside soon.

The rupee hit a fresh low of 92.67 on March 18 amid broader stress across global markets due to inflationary fears as crude oil supplies remain affected. Disruption in crude oil supply through the Strait of Hormuz, which has impacted around 15-20 per cent of the global oil supply, has led to a sharp rally in fuel and energy prices. The Brent crude oil prices have jumped around 40 per cent since the war on Iran began on February 28, and are currently trading at $103.5 per barrel.

As the Iran war turns out to be a prolonged war, a rise in crude oil prices has also added to concerns about inflationary pressures and rising import bill for India, as the country imports around 80 per cent of its energy consumption requirements. India remains a heavily import-dependent economy, and the disruption in the Red Sea has cast a multiple import-heavy commodities, such as fertilisers, along with fuel and energy.

Rising energy prices are expected to widen the current account deficit, which will push the financial burden for Indian companies. As the demand for dollars increases as Indian companies look to repay imports, it could further lead to a fall in the rupee.

Rising inflation at a time when the rupee is falling could also prompt the Reserve Bank of India (RBI) to keep interest rates higher for longer, or raise them if the headline inflation pushed past the central bank’s upper target band of 6 per cent consistently. India’s inflation is currently around 3.2 per cent, within the target band of 2-6 per cent. But the developing conflicts in West Asia could maintain price pressure along with the fear of moderating growth.

Additionally, the RBI draining rupee liquidity to arrest volatility in the currency has also led to rising borrowing costs for companies. This, combined with already high input costs due to the rise in energy prices, is expected to impact businesses and their profitability. Stock markets have been volatile, led by sales by foreign portfolio investors (FPIs), but rising concerns of company valuations and slowing margins for companies could also lead to a further correction in the market.

The rupee is expected to remain under pressure if the Iran war and conflicts in West Asia continue for a long time. The upcoming decision of the US Federal Reserve’s interest rate decision will also be a key trigger.

“The currency remained under pressure due to strong dollar demand from oil importers and foreign fund outflows, although the RBI intervened by selling dollars to limit excessive volatility. Depreciation pressures are likely to persist if crude oil prices remain elevated. Going ahead, markets will track developments in West Asia, movements in crude oil prices and trends in foreign fund flows for directional cues. Updates on India–US trade agreement and the upcoming Federal Reserve interest rate decision will also be key triggers,” Motilal Oswal said in a note.