Rupee fell to a
lifetime low on Tuesday, weighed by intensifying external
pressures, with the protracted Iran conflict driving a sustained
surge in oil prices and pushing U.S. Treasury yields higher.
The rupee dropped to 96.44 per U.S. dollar, slipping past the prior lifetime low of 96.3875 hit on Monday. The currency’s losses since the Iran war broke out in late February now total 6%.
The combination of high crude prices, underpinned by the
prolonged U.S.-Iran impasse, and subdued capital inflows is
widening India’s external imbalances and leaving the rupee
vulnerable.
Economists expect India’s current account deficit to widen
significantly in the current fiscal year. A potential hit to
remittances from the Middle East and expectations of subdued
portfolio flows on rising concerns over India’s growth outlook
could add to external sector pressures.
India’s balance of payments is set to widen to a deficit in
the range of $65 to $70 billion this year, economists estimate,
marking a third straight year of deficits and underscoring
persistent external sector pressures.
India “faces a two-fold challenge…to lower the current
account deficit and attract capital inflows that are
sustainable,” HSBC said in a note.
“The continued distribution of FX market pressure between
currency weakness (which can lower the trade deficit over time)
and FX reserve use should help.”
High oil prices are already feeding through to India’s
external and inflation dynamics.
The merchandise trade deficit widened to $28.38 billion in
April, driven largely by a surge in crude oil imports to a
six-month high.
At the same time, April wholesale inflation accelerated to
its highest level in three-and-a-half years, underscoring the
pass-through of higher energy costs.
Prime Minister Narendra Modi’s recent calls to conserve fuel
and foreign exchange highlight the scale of pressure on the
economy.
U.S. YIELDS ADD TO PRESSURE
The recent surge in U.S. Treasury yields, driven by
inflation concerns, is further complicating the outlook for the
rupee. The U.S. 10-year yield climbed to its highest level in a
year, before easing on Tuesday, with investors increasingly
pricing in the possibility of a Federal Reserve rate hike this
year.
This is likely to make it more challenging for India to
attract the capital inflows needed to finance its current
account deficit, according to analysts.