Rupee hits record low as oil surge strains finances

The Indian rupee fell to a fresh lifetime low on Tuesday as mounting external pressures continued to weigh on the currency.

Rising oil prices linked to the prolonged Iran conflict and higher US Treasury yields added to concerns surrounding India’s external balances.

The rupee weakened to 96.44 per US dollar, breaching the previous record low of 96.3875 touched on Monday.

Since the Iran war began in late February, the currency has declined nearly 6%.

Oil prices intensify pressure on the rupee

The sustained increase in crude oil prices has emerged as a major challenge for India’s economy.

The prolonged US-Iran impasse has kept oil markets elevated, increasing import costs for India, which relies heavily on crude imports.

The combination of higher oil prices and muted capital inflows is widening India’s external imbalances and leaving the rupee vulnerable to further declines.

Economists expect India’s current account deficit to widen significantly during the current fiscal year.

Analysts also warned that softer remittances from the Middle East, along with weaker portfolio inflows due to concerns over India’s growth outlook, could further strain the external sector.

Estimates suggest India’s balance of payments deficit could widen to between $65 billion and $70 billion this year.

If realised, it would mark the third consecutive year of deficits and highlight persistent stress in the country’s external position.

HSBC flags dual challenge for India

HSBC said India is currently dealing with two major economic challenges linked to the external sector.

"India faces a two-fold challenge.to lower the current account deficit and attract capital inflows that are sustainable,” HSBC said in a note.

The bank added that, “the continued distribution of FX market pressure between currency weakness (which can ‌lower the ⁠trade deficit over time) and FX reserve use should help.”

The pressure from elevated oil prices is already visible in India’s trade and inflation data.

India’s merchandise trade deficit widened to $28.38 billion in April, largely due to a sharp increase in crude oil imports, which climbed to a six-month high.

Meanwhile, wholesale inflation in April accelerated to its highest level in three-and-a-half years, reflecting the impact of higher energy prices on domestic costs.

Prime Minister Narendra Modi recently urged citizens to conserve fuel and foreign exchange, underlining growing concerns over the economic impact of rising oil prices.

Higher US yields complicate outlook

Apart from oil prices, rising US Treasury yields are adding another layer of pressure on the rupee.

The US 10-year Treasury yield recently climbed to its highest level in a year before easing slightly on Tuesday.

The move has been driven by inflation concerns and growing expectations that the Federal Reserve could raise interest rates again this year.

Analysts said higher US yields could make it harder for India to attract the foreign capital needed to finance its widening current account deficit.

The rise in yields has also strengthened the US dollar globally, further pressuring emerging market currencies, including the rupee.

With crude oil prices remaining elevated and global financial conditions tightening, market participants are expected to closely monitor India’s external sector indicators and capital flow trends in the coming months.