The Indian rupee plunged further on Thursday and hit a new all-time low of Rs. 95.27 against the US dollar, breaching the Rs. 95 mark. The currency opened at Rs. 95.02, against the previous close of Rs. 94.84, and maintained its downward trend amid rising crude oil prices and continued foreign capital outflows.
This is the second time the rupee has crossed the threshold of Rs. 95, indicating increased pressure on the domestic currency, during which it ha lost nearly 5.8% of its value.
A key reason behind the rupee’s downfall is the sharp rise in oil prices. Brent crude was trading at over $122 per barrel, a three-year high, while the US West Texas Intermediate (WTI) was around $110 per barrel. This comes amid growing geopolitical tensions between the US and Iran, with supply disruptions in the Strait of Hormuz – a route which accounts for around 20% of global energy transports.
“The main effect on the rupee has been from the rising oil prices, which again touched $120 per barrel and looked headed for further upside, as the US continues with its blockade of Iranian ports while Iran does not allow any ship/tanker to pass through the Strait of Hormuz,” said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.
Since India is a key importer of oil, the demand for dollars increases with an increase in crude prices, which puts further pressure on the rupee.
The rise in crude prices is also inflating India’s import bill. According to the market estimates, oil alone has added $12-$13 billion to imports every month over the past three months.
“Over the past three months, oil alone has added $12-$13 billion every month to the import bill. That’s not just a number; that’s pressure — pressure on the trade deficit, pressure on inflation, and ultimately, pressure on the rupee,” said Amit Pabari, Managing Director at CR Forex Advisors.
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US President Donald Trump said he would not lift the naval blockade of Iran’s ports until a nuclear deal is reached, while Iranian officials have shown no indication of stepping back.
Foreign portfolio investors (FPIs) have continued to put pressure on the currency. Outflows of $20 billion have been pulled out of Indian equities year-to-date, more than last year. As of 29th April, the FIIs recorded a net outflow of Rs. 2,185.95 crores.
The strength of the US dollar has added to the pressure. The US Dollar Index rose after the US Federal Reserve delivered its policy decision, which was relatively hawkish. The US central bank held rates steady and reinforced a “higher-for-longer” stance.
This has increased demand for the dollar as a safe-haven asset and capital flight from emerging markets such as India.