Indian rupee’s record low sparks fears of more downward bias, to test Rs 93 level soon, say analysts

Indian rupee

• Rupee hits record low, surpasses Rs 92 per US dollar
• High Brent crude prices and Mideast tensions drive rupee fall
• Analysts fear rupee may drop below Rs 93 without RBI action

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The Indian rupee ended at a record low, breaching the Rs 92 per dollar mark for the first time in history, as elevated Brent crude prices amid geopolitical tensions in the Middle East left investors scrambling towards safe-haven assets such as the U.S dollar and gold.

This has now led analysts and dealers to fear the rupee falling even below the Rs 93 per dollar mark in the coming days, unless the Reserve Bank of India (RBI) steps up and intervenes further in the spot and offshore non-deliverable forwards (NDF) markets with its dollar sales to arrest any further sharp depreciations in the currency. The RBI was already active when the rupee was nearing the Rs 91 per dollar mark.

“If I'm looking at the way the RBI has been managing liquidity conditions, I think most of it has been very calibrated. The growth picture has actually been on the stronger side, which is good, which gives policymakers a buffer to deal with counter-cyclical policy,” Lavanya Venkateswaran, a senior economist with OCBC Bank, said.

On March 4, the rupee ended at Rs 92.15 to the dollar, as compared to 91.47 in the previous session. The rupee fell as low as 92.31 during the day, post which the RBI was likely present in the market to prevent a free fall in the rupee, according to traders. The currency lost nearly 70 paise in a single day, in one of the largest intraday drops in recent months.

The currency and fixed-income markets were closed on March 3 due to a public holiday.

Four days into the conflict, both Israeli and U.S. forces have intensified strikes across Iran. In response, Iran has launched retaliatory drone attacks on U.S. 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 India’s energy imports arise from that particular route.

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 (CAD). Although it may not be immediate, a potential rise towards $100 barrel in the near-term will likely cause more damage to the rupee’s prospects.

“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,” Sachin Sawrikar, Founder and Managing Partner, Artha Bharat Investment Managers.

The currency is already the worst-performing among emerging Asian economies, losing more than 2% on a year-to-date basis, according to data from Bloomberg. With crude prices remaining volatile and geopolitical tensions showing no immediate signs of easing, the rupee is likely to stay under pressure in the near term.