The rupee hit a historic low of 76.96 against the US dollar on Monday, after crude oil prices hit their highest levels in 14 years as concerns about the Russia-Ukraine war rattled the financial markets. The rupee slid below the COVID era-low of 76.90 -- struck in April 2020 -- during the session, before finishing the day at the new all-time low.
Heightened geopolitical uncertainty damaged investors' appetite for risk globally, causing a sell-off across equities. Indian equity benchmarks tanked more than three percent each amid deep cuts across most sectors barring metals, which rose along with other commodities.
The greenback and US bond yields surged as higher oil rates fuelled worries about a worse-than-expected acceleration in inflation and its impact on key interest rates.
Weakness in the rupee is likely to make imports more expensive for India, which meets more than two-thirds of its oil requirement through imports. The depreciation in the rupee may widen India's twin deficits: the current account deficit and the trade deficit.
"With every $10 rise in crude price, there is a considerable negative impact on our current account deficit, and inflation is estimated to rise by 24 bps," Sugandha Sachdeva, VP-Commodity and Currency Research at Religare Broking, told CNBTV18.com.
"The Indian rupee is reeling under the triple whammy of overheated oil prices, panic selling by the FPIs and the strength in the dollar index. Rising crude oil prices in international markets amid the intensifying geopolitical crisis are likely to push up domestic inflation and widen the current account deficit. It's not just about crude, heavy selling by the FPI's in domestic equity markets has also been a key culprit for the rupee weakness," she said.
Sachdeva expects the rupee to continue in negative territory and test the 77.50 level against the US currency in the near term.
Here are key factors behind the rupee's depreciation to lifetime lows against the greenback:
: The primary reason behind the depreciation in the rupee is the gain in crude oil rates. Global benchmark Brent crude surged to $139.1 per barrel and West Texas Intermediate crude rose to $130.5 - both 14-year highs. Fears of the possibility of a ban on Russian oil and natural gas have crept up at a time when top crude producers have remained committed to only modest increases in output, ignoring the Ukraine crisis.
The USD-INR pair has breached major resistance at 76.80-76.84, and may move to 77.20-77.35 levels in the coming session if crude oil prices continue to boil, said Kshitij Purohit, Lead Currency and Commodities at CapitalVia.
"India's traditionally non-interventionist central bank may allow further depreciation of Asia's worst-performing currency since the start of the Ukraine conflict in the hope that a weaker rupee will increase export competitiveness and help close gaps presumably widening due to rising oil costs," he said.
The RBI usually sells dollars via state-run banks to prevent sharp depreciation in the rupee.
(Edited by : Akanksha Upadhyay)
First Published: Mar 7, 2022 2:54 PM IST
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