Rupee hits record low yet again, nears Rs 97 against US dollar

The rupee slipped to a fresh record low of 96.44 against the US dollar on Tuesday, nearing the Rs 97 mark. Rising crude prices, weak capital inflows and higher US yields are adding to pressure on India's external finances despite RBI intervention.

In Short

• India's oil import dependence is deepening pressure on dollar demand
• Economists expect the current account deficit to widen sharply this year
• April trade deficit widened as crude imports climbed to a six-month high

The rupee slipped to yet another record low on Tuesday, coming close to the Rs 97 mark against the US dollar, as rising crude oil prices, growing pressure on India’s external finances and higher US bond yields continued to weaken the currency.

The rupee fell to 96.44 against the dollar, crossing its previous lifetime low of 96.3875 touched on Monday.

The currency has now weakened nearly 6% since the Iran war began in late February, making it one of Asia’s worst-performing currencies this year.

WHY THE RUPEE IS FALLING AGAIN

The latest fall in the rupee is mainly being driven by three major pressures:

• rising crude oil prices,
• weak foreign capital inflows,
• and higher US Treasury yields.

India imports nearly 85% of its crude oil requirements. As oil prices rise globally, India has to spend more dollars on imports, increasing pressure on the rupee.

The ongoing conflict involving Iran and tensions in West Asia have pushed oil prices sharply higher in recent months. The prolonged stand-off between the US and Iran has also raised fears of disruptions around the Strait of Hormuz, one of the world’s most important oil shipping routes.

Higher oil prices are increasing India’s import bill and widening the country’s current account deficit.

Economists now expect India’s current account deficit to widen sharply during the current financial year.

INDIA’S EXTERNAL PRESSURE IS RISING

Experts say India’s external sector is facing growing pressure because high oil prices are coming at a time when foreign investment flows remain weak.

According to economist estimates, India’s balance of payments deficit could widen to between USD 65 billion and USD 70 billion this year.

If that happens, it would mark the third straight year of deficits for India’s external accounts.

Global financial firm HSBC said India is facing a “two-fold challenge” of reducing its current account deficit while also attracting stable foreign capital inflows.

Weak portfolio investments and concerns over India’s economic growth outlook are making the situation more difficult.

Economists also warn that remittances from the Middle East could come under pressure if the conflict in the region continues for a prolonged period.

HIGH OIL PRICES HURTING INDIA

The impact of rising energy prices is already becoming visible in economic data.

India’s merchandise trade deficit widened to USD 28.38 billion in April, mainly because crude oil imports rose to a six-month high.

At the same time, wholesale inflation in April climbed to its highest level in three-and-a-half years, showing that higher fuel and energy prices are slowly pushing up costs across the economy.

The government has already increased petrol and diesel prices twice recently as state-run oil marketing companies struggled to absorb rising global crude oil costs.

Prime Minister Narendra Modi has also urged people to conserve fuel and reduce unnecessary foreign exchange spending, highlighting concerns around the pressure building on the economy.

US BOND YIELDS ADDING MORE PRESSURE

Another major reason behind the rupee’s fall is the sharp rise in US Treasury yields.

The US 10-year Treasury yield recently climbed to its highest level in a year as investors increasingly started pricing in the possibility of another interest rate hike by the US Federal Reserve.

Higher US bond yields usually attract global investors towards dollar assets because they offer better returns.

This makes it harder for countries like India to attract foreign investment flows needed to finance trade and current account deficits.

The stronger dollar is also increasing pressure on emerging market currencies globally, including the rupee.

RBI INTERVENTION LIMITING LOSSES

Traders believe the Reserve Bank of India has been intervening in the currency market by selling dollars to slow the pace of the rupee’s fall.

Apart from direct intervention, policymakers have also taken regulatory steps in recent weeks to manage pressure on foreign exchange reserves and imports.

However, analysts say the rupee may continue to remain under pressure if crude oil prices stay elevated and foreign investment flows remain weak.

Markets are now closely watching global crude oil prices, developments in West Asia, US interest rate expectations, and RBI’s response to currency volatility.

- Ends