MUMBAI: The rupee has plumbed new lows, crossing past the sensitive 92-mark dollar for the first time Wednesday, though likely central bank intervention curbed further losses in Asia's worst-performing currency for the second year on trot, as the escalating Middle East war pummelled global markets and all other asset classes but set the crude oil on fire having rallied more than 13% since Saturday. The domestic market closed with deep cuts for the second day with the indices losing over 3.25% each in just two days since the war began, while the benchmark 10-year bond yield rose 4 bps to 6.717%.
The rupee fell to 92.32, down about 0.91% or 72 paise in one of the largest single-day drops in recent months, eclipsing its previous record low of 91.9875 hit in January. The rupee, which has lost more than 2.6% so far this year on the back of losing 4.9% in the previous year, opened 50 paise down from previous close of 91.68 and went on to lose more ground till the central bank intervened, preventing more losses and helping it close at 92.15—still a new record low.
And analysts don’t see this is the end but say the unit crossing the 93 level is not very far as blamed the raging war and the resultant spike in crude have left investors scrambling towards safe-haven assets such as the dollar and gold, as the main pains for the rupee.
Sudeep Shah, head of technical and derivatives research at SBI Securities, told TNIE that the rupee is pressured mainly by the sharp rise in global crude prices amid escalating tensions in the Middle East.
“Higher oil prices increase our import bill, heighten inflation risks, and widen trade deficit, all of which weigh on the currency. Despite these challenges, a fall to 100 to a dollar appears unlikely,” Shah said, adding the RBI has a strong track record of intervening to curb excessive volatility and is expected to act decisively if the situation worsens. Therefore, while “the near-term weakness may persist, an extreme fall remains improbable.”
“For foreign investors, currency volatility directly affects dollar-adjusted returns. If depreciation outpaces yield differentials, it may deter portfolio inflows and potentially trigger FPI outflows,” said Sachin Sawrikar, founder and managing partner at Artha Bharat Investment Managers ISFC.
"The Middle East conflict is acting as the catalyst for the rupee pains but the broader trend for the rupee has been clearly on the weaker side," said Tanay Dalal, senior vice-president for business and economic research at Axis Bank.
"The RBI would need to continue smoothing the rupee to avoid second-round volatility effects, until a more durable equilibrium between financial inflows and outflows is achieved," he added.
"Remittances from the Middle East as well as capital flows are likely to get impacted in the scenario of an extended regional conflict," analysts at Kotak Mahindra Bank said, adding in the case of an extended crisis, the country’s macroeconomic outlook is expected to weaken through widening of current account deficit, higher inflation, sharper rupee depreciation and lower growth."
Abhishek Bisen, head of fixed income at Kotak Mahindra AMC said the rupee has slipped to a near‑record low of 92.32 as escalating Iran war has heightened fears of disruptions in the Strait of Hormuz and the resultant spike in crude prices, with Brent rising roughly 13%. All these has amplified macro risks for the country, given its near full dependency on oil imports.
“Higher crude prices threaten to widen the current account deficit and reinforce inflationary pressures, prompting the likelihood of RBI intervention to curb excessive volatility, although sentiment remains fragile amid concerns of potential portfolio outflows.
Even so, given that the rupee was already relatively weak on a REER basis, a disproportionate depreciation vs peer currencies appears unlikely. Much of the current weakness reflects markets pricing in a high probability of further geopolitical escalation; therefore, if tensions fail to intensify, crude prices to ease and the rupee to regain strength.
Four days into the conflict, both Israeli and US forces have intensified strikes across Iran. In response, Iran has launched retaliatory drone attacks on US missions in the Gulf. As a result, the Strait of Hormuz has been shut off, choking a crucial passage of oil towards major economies. Nearly 40% of our energy imports pass through the Strait.
Elevated Brent crude prices are detrimental to the rupee, as they will lead to a higher import bill, and therefore lead to a wider current account deficit. Although it may not be immediate, a potential rise towards $100 a barrel in the near-term will likely cause more damage to the rupee’s prospects.