Rupee closes at a new low of 92.34 on crude surge worries

This is the first time since the rupee became market-driven that we have had two consecutive years of BOP deficit.

The  rupee slumped to a new low on March 9, closing at 92.34 against the US dollar, as crude surged above $100 a barrel. The Reserve Bank of India (RBI) likely stepped in aggressively to arrest the fall in the rupee, as crude blew past $115, traders said.

The currency ended at Rs 92.34 after closing the previous session at Rs 91.74. It moved in a range of more than 50 paise through the day.

The US-Israel and Iran conflict, which is now in its second week, is showing no signs of coming to an end and even desalination and fuel assets are being targeted. The intensifying conflict has rattled global businesses and energy prices have been jumping almost every day, leading to fears of an oil shock.

The benchmark Brent crude has jumped more than 20 percent since the start of the month.

“This is not just an oil price shock. When such a major artery of the global energy system is disrupted, the market is not only repricing risk but also adjusting to the possibility of a real supply constraint,” Anindya Banerjee, Head of Currency and Commodities at Kotak Securities, said.

He was referring to the Strait of Hormuz, through which 40 per cent of India’s energy imports arrive and has been virtually shut off since the start of the war on February 28.

At 3.30 pm, the Brent was trading at around $103, coming down from the initial level of near-$120 early in the day. This crude cooled on reports that the G7 countries were considering releasing 400 million barrels of oil reserves in response to a potential oil supply and price shock.

Higher Brent is a negative for India, which meets more than 85 percent of its energy needs through imports and can widen the country’s currency account deficit.

"The Reserve Bank of India has aggressively defended the rupee, deploying an estimated $12 billion across spot and offshore non-deliverable forwards (NDF) markets last week, traders said. The central bank likely intervened on March 9 as well to cushion the fall.

“Sentiment has been playing a bigger role in the short-term price actions. The RBI likely sold dollars in the opening, but still, the rupee was unable to gain ground. This kind of thing happens when short-term uncertainty is on a higher side,” Dilip Parmar, a forex analyst with HDFC Securities, said.

Market participants are also moving towards longer tenures of dollar forward contracts, as a technical move that provides more room and stability to the rupee, Parmar said.

“Acting in the short term usually involves higher premiums due to greater volatility and risk, considering current geopolitical worries. Comparatively, longer maturities carry relatively lower premium risk and volatility. During periods of volatility, hedgers typically prefer relatively longer maturities,” he said.

The rupee could fall to Rs 93 level soon, should Brent continue to remain under pressure, which could prompt more RBI intervention, traders said.