Indian Rupee Hits Record Low On Soaring Oil, FPI Outflows
The Indian rupee hit its lowest level against the U.S. dollar amid soaring oil prices and continued outflows of foreign portfolio money.
The rupee opened at 76.94 against the U.S. dollar compared to a close of 76.17 on Friday. It weakened further during the day, falling by over 1% to 76.98. It closed at 76.97 against the greenback.
The rupee's previous low was at 76.91, where the currency traded in April 2020.
Crude prices surged 7.8% from the previous close on Friday to $127.35 during Monday's trade. Prices had briefly touched a high of $139.13 over the weekend after the U.S. said it was discussing a ban on Russian crude imports, Bloomberg reported.
"Geopolitical issues between Russia-Ukraine are seemingly far from over thus, leading to a stronger dollar index and pushing crude oil prices to a discomforting level last seen only in 2008," said Imran Kazi, vice president at Mecklai Financial.
If crude oil prices average $100 a barrel over 2022, India's current account deficit could widen to 3% of GDP, economists have cautioned.
A higher current account deficit is likely to put pressure on the rupee. "The rupee has already depreciated close to 76/$ levels and could easily push towards the 77/$, which will then test the resolve of the RBI, to restrict further depreciation by way of selling dollar," said a note by Deutsche Bank.
In addition, slower portfolio flows could put pressure on the balance of payments.
In the first three months of the calendar year, foreign investors have sold a net of Rs 84,131 crore across India's equity and debt markets, showed data from National Securities Depository Ltd.
Weakness To Persist
There are four factors behind the rupee’s depreciation—oil prices, dollar shortage, relentless outflows from equity with a risk of spill over to debt now and the unwinding of the carry trade, said Anindya Banerjee, vice president for currency derivatives and interest rate derivatives at Kotak Securities. The unwinding of the carry trade, in particular, can cause a far bigger reaction on the dollar-rupee, which is why the RBI is intervening aggressively, Banerjee said.
"Once the rupee establishes itself at 77, the next level we are looking at is 78 sometime this week unless oil price shows a reversal," he said.
Given the continuing pressure, the rupee could trade in a range of 76.30-77.30 in the near term, said the currency research desk at Reliance Securities.
Harihar Krishnamoorthy, treasurer, FirstRand Bank, however, expects the rupee's weakness to persist.
"It’s clearly a cause-and-effect issue. Amid the Russia-Ukraine conflict ongoing, there are now talks of a Russian oil and gas ban. These were kept out of the sanctions so far and if this does happen then there will be supply choke," Krishnamoorthy said. "Weakness in the rupee is definitely set to continue if foreign outflows continue and oil climbs higher."
(Corrects an earlier version that misstated Banerjee's designation.)