MUMBAI: The Indian rupee opened weaker and fell to a one-month low on Monday after a sharp escalation in the Iran-US conflict over the weekend pushed global crude oil prices higher and triggered a risk-off mood across emerging markets.
The rupee opened 25 paise lower at 91.2462 per dollar and slipped to an intraday low of 91.4025, its weakest level in about a month, according to Bloomberg data. It had closed at 90.9775 on Friday.
Brent crude surged to around $80 a barrel in Asia trade, while the US dollar strengthened as markets assessed the fallout from US and Israeli strikes on Iran and the reported killing of Iran’s top leader, Ayatollah Ali Khamenei, over the weekend.
The Indian currency is seen as particularly vulnerable given the country’s dependence on imported crude and deep trade linkages with West Asia. The near-term outlook for the rupee has turned negative, said Ritesh Bhansali, deputy chief executive officer at Meckali Financial Services.
“With global equities negative, overall sentiment is negative and with India being more sensitive, the rupee will feel the direct hit. So, right now, 91.50 to 92 is a possibility in case Brent crude prices reach north of $80,” Bhansali said.
However, he said he does not expect the rupee to sustain levels near 92 per dollar in the near term, as uncertainty remains high and market direction will depend on news flow and foreign capital movements.
Bhansali warned that if crude climbs to $90, “I would not rule out even 93 odd levels because that is going to have a direct impact on inflation, current account deficit, as well as the sentiment.”
A March 2 report by MUFG Bank echoed a similar view, saying currencies such as the Indian rupee are more vulnerable in a scenario of sustained oil price increases because of their reliance on imports.
Iran’s threat to block the Strait of Hormuz could have a significant impact on India. The waterway accounts for roughly 50% of India’s monthly crude imports and more than a tenth of its non-oil exports that transit the region.
India, the world’s third-largest oil buyer, consumes about 5.5 million barrels of crude oil daily, and 1.5-2 million of those barrels pass through this choke point vital for global energy supplies. With India already lowering Russian oil imports, West Asia had emerged as an alternative during the past two months.
“Net-net, sustained oil price increase implies that India’s current account deficit will likely breach 2% of GDP…our analysis shows that every US$10/bbl oil price increase could decrease the current account position across Asian economies by around 0.2-0.9% of GDP,” the MUFG Bank report said.
On inflation, Gaura Sengupta, chief economist at IDFC FIRST Bank, downplayed immediate risks.
“We don’t expect any direct impact on inflation as retail petrol and diesel prices have remained unchanged for the last few years. Any temporary spike in petrol prices will be absorbed by OMC (oil marketing companies),” Sengupta said.
“On the budget there is only LPG subsidies, which could see some upside risk if the supply disruption persist. In our base case we the supply disruption to be short-lived. Hence for now no impact on inflation,” she added. However, she cautioned that while India’s current account deficit is already low, “upside risk will only come if upside risk in crude oil prices persist.”