Crude spiking above $115/bbl has sent global markets on a tizzy. Be it equities, currency or the commodity space, all asset classes are seeing a domino impact. The rupee is no exception. It has slumped to a record low of 92.33 against the US dollar. This marks the currency’s second breach past the 92-level mark in less than 7 days.
According to Reuters, the Indian central bank (RBI) stepped into the foreign exchange market today to limit the domestic currency’s decline. Here are four major factors weighing on the Indian Rupee:
#1 Surge in oil prices
The escalation in the Middle East war is driving the surge in crude oil prices. Global oil prices shot past the $100 per barrel mark for the first time since 2022, as the US-Israel conflict with Iran has disrupted shipping through the Strait of Hormuz — one of the world’s most important routes for Middle Eastern oil.
Brent crude, the global benchmark for oil, is currently trading near the $116 per barrel mark in the market, marking a jump of nearly 25% since Friday’s close of $93 per barrel. Meanwhile, the US benchmark, West Texas Intermediate, has also rallied, as it is trading near the $115 per barrel mark.
A spike in crude prices weighs on emerging market currencies like the Indian rupee, as they are net oil importers.
#2 Massive fall in Indian equities
The Sensex crashed over 2,000 points while the Nifty tumbled to 23,700 levels as crude oil spiked past the $115 per barrel mark on the continued escalation of conflict across West Asia.
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments pointed out that, “Brent crude has spiked above $115 delivering a big oil shock to economies and markets. Big oil importers like India will be hit hard if the West Asian conflict lingers long and crude price remains high. The market will price-in the economic consequences of this oil shock. Inflation will certainly move up whether the oil price hike is passed on to consumers or not.
The unknown factor now is how long the conflict will last. This uncertainty will also weigh on FIIs who have again turned aggressive sellers in India after the short bout of buying in February.
The lesson from history is that the impact of geopolitical issues like conflicts on markets do not last long. Therefore, investors have to be patient.”
#3 Fall in Asian equities
These heightened geopolitical tensions have also impacted investor sentiment across Asian equity markets. Asian stock markets tumbled in Monday’s early trade as crude oil prices shot up.
Japan’s benchmark index, Nikkei 225, suffered one of the region’s steepest declines, dropping more than 6% in early trading. The Topix was down 5.27%. South Korea’s Kospi was down 6.5%, triggering a temporary trading halt for the Kospi 200 futures. Hong Kong’s Hang Seng index futures were at 25,328, below the index’s last close of 25,757.29.
Falling Asian equities generate capital outflows and create strong demand for the US dollar, which extends the decline for emerging market currencies like the Indian rupee.
#4 Rise in Dollar Index
The dollar index, which measures the strength of the US Dollar against a basket of six major currencies, climbed to a record high nearing the 100 mark as the surge in oil prices drove demand for the greenback.
“Europe’s heavy reliance on Middle Eastern energy has made the euro vulnerable during the recent oil surge. “CR Forex Advisors MD Amit Pabari said, ” He added that the euro has already fallen more than 2% this month, and since it carries nearly 57% weight in the dollar index, its weakness has automatically pushed the dollar higher.
Foreign Institutional Investors were net sellers of domestic equities worth Rs 6,030 crore as of March 6, according to data available on NSE.
A stronger US Dollar makes currencies like the Indian rupee less appealing for investors, thereby aiding capital outflows.
Outlook for Rupee
Going forward, what’s the outlook for the rupee now? Should it be bracing for a few more tough days ahead? Well experts predict that it may continue to trade near 91-92/ mark against the US dollar “For the coming days, 91.40–91.50 is likely to act as a strong support zone, and if these base holds, the pair could gradually move toward the 92.50-93.00 levels,” Pabari added.
