Rupee Hits One-Month Low Amid Escalating Tensions in the Middle East

Indian Rupee Falls to One-Month Low Amid Escalating Iran-US Conflict

The Indian rupee opened weaker on Monday, falling to a one-month low, following a sharp escalation in the Iran-US conflict over the weekend. The conflict pushed global crude oil prices higher, triggering a risk-off mood across emerging markets. The rupee opened 25 paise lower at 91.2462 per dollar and slipped to an intraday low of 91.4025, its weakest level in about a month.

Brent crude surged to around $80 a barrel in Asia trade, while the US dollar strengthened as markets assessed the fallout from US and Israeli strikes on Iran and the reported killing of Iran's top leader, Ayatollah Ali Khamenei, over the weekend. The Indian currency is seen as particularly vulnerable given the country's dependence on imported crude and deep trade linkages with West Asia.

Meckali Financial Services deputy chief executive officer Ritesh Bhansali warned that the near-term outlook for the rupee has turned negative. With global equities negative, overall sentiment is negative, and with India being more sensitive, the rupee will feel the direct hit. Bhansali expects the rupee to potentially reach 91.50 to 92 in case Brent crude prices reach north of $80.

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However, Bhansali does not expect the rupee to sustain levels near 92 per dollar in the near term, as uncertainty remains high and market direction will depend on news flow and foreign capital movements. If crude climbs to $90, Bhansali warned that the rupee could reach 93 levels due to the direct impact on inflation, current account deficit, and sentiment.

A March 2 report by MUFG Bank echoed a similar view, saying currencies such as the Indian rupee are more vulnerable in a scenario of sustained oil price increases because of their reliance on imports. The report warns that a sustained oil price increase could lead to a breach of 2% of GDP in India's current account deficit.

IDFC FIRST Bank chief economist Gaura Sengupta downplayed immediate risks on inflation, stating that retail petrol and diesel prices have remained unchanged for the last few years. However, she cautioned that while India's current account deficit is already low, upside risk will only come if upside risk in crude oil prices persist.