The Indian rupee hit an all-time low on Tuesday, weighed by expectations of prolonged high crude prices, persistent portfolio outflows and weakening sentiment.
The rupee opened at 95.50 versus the US dollar, slipping past its previous record low of 95.4325 hit last week.
The currency extended its fall to 95.6250, taking losses since the Iran war broke out to 5.2%. The central bank stepped in to smooth the rupee’s fall.
The rupee and other currencies of oil-importing countries have been among the hardest hit following a 46% surge in Brent crude prices triggered by the Iran war. Alongside the rupee, the Philippine peso and the Indonesian rupiah have been impacted severely.
Year-to-date, the rupee has fallen 6.5%, the worst performance among Asian currencies.
The US–Iran conflict, now running for about two-and-a-half months, showed little sign of resolution despite a tenuous ceasefire in place since April 8.
US President Donald Trump said on Monday the truce was "on life support", citing disagreements over key demands made by Iran.
The longer the conflict drags on, the greater the likelihood that oil prices will remain high, keeping the rupee under sustained pressure, analysts said.
Higher oil prices are set to widen India's current account deficit, with the strain compounded by the prospect of continued weak capital inflows.
Foreign investors have pulled out more than $20 billion from Indian equities since the war began, with year-to-date outflows exceeding last year’s record. Overseas investors sold nearly $900 million on Monday, according to preliminary data.
Capital-flow challenges, coupled with a wider current account deficit, point to a weaker rupee and lower FX reserves, ANZ Bank said, adding that the energy price shock has struck India at a time of cyclical recovery in growth and inflation.
India is set for a third consecutive balance of payments deficit this fiscal year, with economists cutting growth forecasts, lifting inflation estimates and lowering rupee projections.
ANZ last week lowered its rupee target for December to 97.5 from 93. BMI, a unit of Fitch Ratings, flagged the risk of the currency sliding to 100 if the Iran war worsens.
Support for rupee
With the rupee under persistent pressure, expectations that policymakers could step in to support the currency have risen, including reviving measures used during the 2013 taper tantrum.
India's Prime Minister Narendra Modi on Sunday urged limits on fuel use, travel and imports to save foreign exchange.
Modi's appeal to citizens to conserve foreign exchange suggests a reduced policy appetite for further worsening of current account and fiscal deficits, Nomura said in a note on Monday.
Potential measures could include disincentivising non-essential imports like gold, tighter rules on outward remittances, a foreign currency deposit mobilization scheme and a hike in domestic fuel prices, Nomura said.
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