The Indian rupee dropped to a historic low of 83.99 against the US dollar on Friday, as concerns over surging oil prices and sustained outflows of foreign capital from the equity markets weighed heavily on the currency.
This sharp decline comes after the rupee had already hit a previous lifetime low of 83.9850 on September 12, signaling increasing pressure on India’s exchange rate amid global economic uncertainties.
The local currency depreciated to 83.9900 from 83.9675 in the previous session, continuing its downward trend. With global markets facing volatility due to a combination of high oil prices and fluctuations in international investor sentiment, the Indian rupee’s recent decline reflects growing challenges for the economy, which relies heavily on imports of crude oil and capital inflows from foreign investors.
Oil Prices Weigh Heavily on the Rupee
The rupee’s fall has largely been attributed to the ongoing rise in crude oil prices, which hit a high earlier in the week before easing slightly on Friday. Brent crude, the international benchmark, slipped 0.09% to $79.33 a barrel but remained on track for its second consecutive weekly gain. Rising oil prices are a particular concern for India, the world’s third-largest importer of crude oil, as higher energy costs increase the country’s import bill, putting additional pressure on the rupee.
Oil prices have seen significant volatility in recent months, driven by a mix of geopolitical tensions, production cuts from major oil-producing nations, and demand fluctuations as global economies grapple with inflation and slowing growth.
For India, higher oil prices translate directly into higher costs for businesses and consumers, increasing inflationary pressures and contributing to a widening current account deficit. These factors, combined with the depreciation of the rupee, have made the situation more challenging for policymakers attempting to balance growth and inflation.
Foreign Institutional Investor (FII) Outflows Exacerbate the Decline
Adding to the currency’s woes is the continued outflow of foreign institutional investments (FIIs) from Indian equities. According to data from the exchanges, FIIs were net sellers on Thursday, offloading shares worth ₹4,926.61 crore. The sustained exodus of foreign funds has been a significant drag on the rupee, as it decreases demand for the local currency while increasing demand for the US dollar, further contributing to the depreciation.
Foreign investors have been cautious about emerging markets like India due to a combination of global economic headwinds, rising interest rates in developed markets, and concerns over inflation.
The US Federal Reserve’s ongoing rate hikes to combat inflation have made the US dollar more attractive, leading to a stronger greenback and a weakening of currencies like the rupee. This has been compounded by fears of slower global economic growth, leading to risk aversion among investors and prompting them to pull out of riskier assets such as emerging market equities.
Expert Opinions on the Rupee’s Trajectory
Despite the rupee’s latest tumble, market experts believe that the currency’s downside is somewhat limited, thanks to the Reserve Bank of India’s (RBI) sizable foreign exchange reserves.
Amit Pabari, Managing Director of CR Forex Advisors, noted that while global headwinds continue to exert pressure on the rupee, the RBI’s reserves provide a buffer that can help stabilize the currency in the near term. He also pointed out that the recent rise in metals, which tend to have a negative correlation with the dollar, could benefit emerging market currencies like the rupee.
In the short term, Pabari expects the USD/INR pair to remain range-bound between 83.80 and 84.05, with the rupee potentially stabilizing within this range. “Looking further ahead, the outlook for the rupee brightens with substantial inflows expected to hit the market,” he said. Pabari added that the rupee could see some recovery in the coming months as foreign investments increase and global oil prices stabilize.
Broader Market Impact and Stock Market Performance
The rupee’s depreciation has also had a ripple effect on the domestic equity markets, with both major indices recording declines on Friday. The benchmark 30-share BSE Sensex was down 259.05 points, or 0.32%, to 81,352.36, while the broader Nifty 50 index fell by 67.40 points, or 0.27%, to 24,931.05. The drop in the indices reflects the cautious sentiment among investors, who are grappling with a combination of rising oil prices, inflationary pressures, and concerns over the global economy.
The weakness in the rupee is likely to continue influencing market sentiment in the coming weeks, as investors assess the impact of global economic conditions on India’s growth prospects. However, analysts remain optimistic that the RBI’s interventions and India’s long-term growth potential could help offset some of the near-term challenges.
Dollar Index and Global Context
The US dollar, meanwhile, has remained strong, with the dollar index, which measures the greenback’s strength against a basket of six major currencies, down just 0.11% to 102.87 points on Friday.
The dollar’s resilience has been a key factor in the rupee’s decline, as investors flock to the safety of the dollar amid rising uncertainty in global financial markets. With the US Federal Reserve continuing its hawkish stance on interest rates, the dollar is expected to remain strong, putting further pressure on emerging market currencies like the rupee.
The Indian economy, like many others, is navigating a complex global landscape, where the interplay of high oil prices, inflationary pressures, and FII outflows will likely continue to drive volatility in both currency and equity markets. While the immediate outlook remains challenging, experts believe that the RBI’s reserves and India’s long-term growth potential could offer some relief moving forward.
As of now, the focus remains on monitoring global oil price trends, FII flows, and the actions of central banks, both in India and internationally, as they work to balance growth, inflation, and financial stability.
