The rupee has reached a new all-time low, nearing Rs 97 against the US dollar on Tuesday. This decline has been attributed to several factors, including escalating crude oil prices and increasing pressures on India’s external finances. The currency depreciated to 96.44 against the dollar, surpassing its previous record of 96.3875 set just a day earlier. Since the onset of the Iran conflict in late February, the rupee has devalued by nearly six per cent, making it one of the weakest performing currencies in Asia this year.

Factors Driving the Rupee’s Fall

Three significant forces are predominantly driving the rupee’s continued decline: rising crude oil prices, weak foreign capital inflows, and increasing US Treasury yields. With India importing about 85 per cent of its crude oil needs, higher global oil prices have led to increased dollar expenditure on imports, consequently placing more strain on the rupee. The ongoing Iran conflict and heightened tensions in West Asia have sharply elevated oil prices, raising concerns over potential disruptions in the Strait of Hormuz, a crucial oil shipping corridor. As a result, economists anticipate a substantial widening of India’s current account deficit in the current financial year.

Experts indicate that the external sector is increasingly under pressure, as surging oil prices coincide with weak foreign investment inflows. Estimates suggest that India’s balance of payments deficit could escalate to between $65 billion and $70 billion this year, potentially marking the third consecutive year of deficits for the country’s external accounts. A major financial institution highlighted the dual challenge facing India: reducing its current account deficit while also attracting necessary foreign capital.

Concerns about investment and India’s economic growth outlook further exacerbate the situation. Analysts also warn that the ongoing regional conflict could negatively impact remittances from the Middle East, an important source of foreign currency for the country.

Impact of Rising Energy Prices on Economic Data

The repercussions of increasing energy prices are becoming evident in economic indicators. India’s merchandise trade deficit expanded to $28.38 billion in April, primarily due to a surge in crude oil imports reaching a six-month high. Concurrently, wholesale inflation for the month reached its highest level in three-and-a-half years, indicating that escalating fuel and energy costs are gradually raising expenses across various sectors of the economy.

The Indian government has also responded to rising oil prices by increasing petrol and diesel costs twice in recent weeks, as state-owned oil marketing firms struggle to accommodate the higher global crude costs. Prime Minister Narendra Modi has encouraged citizens to conserve fuel and minimise unnecessary foreign exchange expenditure, underlining the mounting economic pressures.

US Bond Yields Contributing to Currency Weakness

Another contributing factor to the rupee’s decline is the marked increase in US Treasury yields. The yield on the US 10-year Treasury bond recently soared to its highest level in a year, as investors begin to factor in the likelihood of another interest rate hike by the US Federal Reserve. Higher US bond yields generally attract global investors to dollar-denominated assets due to potentially superior returns, making it more challenging for India to secure the foreign investments required to bridge trade and current account deficits.

The strengthening dollar further complicates the situation for emerging market currencies, including the rupee. In response to these challenges, market traders believe that the Reserve Bank of India has been intervening in the currency market, selling dollars to mitigate the speed of the rupee’s decline. Policymakers have also enacted regulatory measures recently to manage pressures on foreign exchange reserves and import levels. However, analysts caution that the rupee will likely remain under stress if high crude oil prices persist and foreign investment inflows do not improve.

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