The rupee has slid past the 96-per-dollar mark after a gap of less than two months, showing new weakness after the US renewed strikes against Iran to end a ceasefire which rested on uncertainty.
The rupee depreciated to an intraday low of 96.23 on Tuesday, reaching its weakest level since May 22, amid a spike in oil prices and strengthening of the US dollar. The rupee led the fall in the Asian currencies, and ended Tuesday’s trade at 96.20 against the dollar, down 0.6% from its previous close.
Brent crude rose over 4% to $87 per barrel in futures trade as supplies choked on escalation of conflict over control of the Strait of Hormuz. Higher oil prices tend to inflate India’s import bill, expand the current account deficit (CAD) and put pressure on the rupee.
“The levels of the rupee will be an interplay of oil prices and the US interest rate cycle. If oil prices stay elevated, then the US Fed will be forced to hike rates,” said Anindya Banerjee, head of commodity and currency research, Kotak Securities.
The rupee seems to have entered a turning point after sinking to a low of 96.96 on May 20 and staying at the 96 levels till May 22. The Reserve Bank of India’s swap facility on foreign currency non-resident (FCNR) deposits, external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) induced a positive sentiment on the currency. This seems to be reversing after the fresh burst of hostilities between the US and Iran.
“The rupee’s depreciation on Tuesday was driven by negative global sentiment following the blockade of the Strait of Hormuz, which pushed crude oil prices. Rising US Treasury yields and sustained importer demand further weighed on the Indian currency. While the RBI is expected to intervene to curb excessive volatility, the rupee is likely to remain under pressure as long as oil prices stay elevated,” said Ritesh Bhansali, deputy chief executive officer, Mecklai Financial Services.
The RBI likely intervened in the market and stemmed the rupee’s further slide.
“The external geopolitical tensions and the rise in crude oil prices have put pressure on the rupee. The RBI was seen selling dollars in the forward market to support the rupee, but outflow of the dollar to safe havens like the US treasury led to the fall. But we expect a pullback once tensions settle down,” said the treasury head of a large bank.
US Treasury yields increased, with the 10-year yield reaching 4.6278%, driven by rising expectations of Federal Reserve interest rate hikes amid West Asia tensions. This follows President Trump’s announcement of a blockade on Iranian ports, pushing oil prices higher and fuelling speculation of two Fed rate hikes by April next year.
Forex traders said the fear of escalation of the conflict is driving foreign institutional investors (FIIs) to safe haven assets like the US treasury, deserting the riskier emerging markets.
Traders expect the rupee to recover some ground once the forex inflows under the RBI’s new dollar-swap scheme accelerate. An inflow of about $10 billion has so far come under this scheme.
“The FCNR(B) flows through the special schemes of the RBI are expected to support the rupee and the range expected to be 96-97 in the medium term,” said Banerjee.
The oil price behaviour will also be a determining factor. “The encouraging flows under the FCNR(B) scheme should hold well for the rupee. Today’s rout is not restricted to the rupee; there has been a selloff in the equity as well as the bond markets. Once the rhetoric dies down and crude comes off, we should see an all-round recovery,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.