The rupee also came under selling pressure on Thursday and was at 95.70 against the dollar. It had closed at 95.36 on Wednesday. The domestic currency dropped to a record low as many headwinds converged to shake investor sentiment.
Three Key Pressures
The sudden collapse of the rupee is attributed to three main reasons: Stalled Iran-US talks: Talks between Iran and the United States over a nuclear deal and sanctions relief have reached an impasse. The lack of progress has put hopes of return of Iranian crude to international markets on hold and supply concern remains strong.
Stronger Dollar Overseas: The US dollar index held firm at multi-month highs on expectations that the Federal Reserve will maintain higher interest rates for longer. Good news for emerging market currencies like the rupee will make them less accessible to foreign investors. Higher Crude Oil prices: Brent crude was above $87 a barrel and India’s import bill was on the rise. As the third-largest oil importer, every $10 rise in crude prices widens India’s current account deficit by about $15 billion.
Forex Market Reaction
The dollar demand from importers, especially oil marketing companies, was high as they rushed to cover their positions given the high crude prices. Meanwhile, foreign portfolio investors (FPIs) have pulled out over ₹35,000 crore from Indian equities over the past one month and this has added to the pressure on the rupee. The rupee is under simultaneous pressure from external and domestic factors. Stalled Iran talks removed an important downside risk for oil prices and the Fed's hawkish stance continues to support the dollar, said a treasury head at a private bank.
What next?
The RBI is expected to act through dollar sales to curb excessive volatility but has limited resources to intervene because of the strength of the greenback worldwide. The rupee could be at 96-97 in the next few weeks, analysts say, and if crude prices reach $90, the Indian currency can be at 96-97.
In the meantime, importers remain on edge, while exporters will benefit from a weaker rupee. The next few weeks will be of great importance as markets wait for Iran-US talks to be resolved and for the RBI to make more steps to act.
