The Indian rupee is set to fall to an all-time low on Monday due to a sustained rise in global crude oil prices and growing concerns over India’s external balance amid an escalating war in West Asia.
One month non-deliverable forward indicates the rupee will open between 92.30 to 92.35 against the greenback. This represents a sharp decline from Friday’s close of 91.74 and threatens to breach the previous record low of 92.30 set just last week.
geopolitical premium
The currency’s decline is directly linked to shocks in global energy markets. Brent crude oil prices rose more than 25% on Monday to near $117 a barrel, a massive 28% gain from last week.
Nearly 50% of the cumulative increase in oil prices is being caused by the expansion of the Iran war. Real output cuts from major Gulf producers as well as fears of prolonged supply disruption through the vital Strait of Hormuz have intensified.
Geopolitical risks increased after Tehran on Monday appointed Mojtaba Khamenei as supreme leader, succeeding his father Ali Khamenei. The succession suggests the radicals maintain a tight grip on the country, boosting market expectations of a protracted conflict.
Fear of deficit and RBI intervention
For India – one of the world’s largest importers of crude – triple-digit oil prices pose a serious macroeconomic headwind. The price shock threatens to increase the country’s import bill, widen the current account deficit and put sustained downward pressure on the local currency.
With fundamental pressures rising, the market’s attention has completely focused on the Reserve Bank of India (RBI).
“Obviously, there will be a lot of pressure on the rupee today. It will probably be a unilateral move and it will be up to the RBI to intervene and calm the market,” said a Mumbai-based currency trader. The central bank actively deployed its reserves last week to control the rupee’s decline, and market participants widely expect renewed dollar-selling intervention if the depreciation accelerates.
broad market exposure
The rupee’s local struggle is playing out against the backdrop of broader global risk aversion. The flight to safety has hit equities around the world, with US stock futures falling more than 2% in early trading. Across Asia, Japanese and South Korean benchmarks suffered a sharp selloff, falling about 6.5% each as investors struggled to price in the geopolitical fallout.