Indian rupee plunges to record low of 95.33 per dollar as oil surge and outflows batter currency

Key facts

• Rupee hit an intraday record low of 95.33 per dollar on Thursday.
• Brent crude oil surged past $125 per barrel, stoking inflation fears.
• The Reserve Bank of India intervened via state-run banks to curb losses.
• Foreign institutional investors have been persistently selling Indian assets.
• The rupee closed at a record low of 94.85 per dollar on Wednesday.
• India's forex reserves stood at $703 billion as of the latest data.
• Analysts project the rupee could weaken to 96-97 per dollar.
• India's central bank offered state-run oil refiners a special FX credit line via State Bank of India in mid-April.

Rupee breaches 95 mark as oil prices hit 2022 highs

The Indian rupee plunged to an all-time low of 95.33 against the US dollar on Thursday, surpassing its previous record of 95.21 set in late March. The currency weakened as much as 0.5% during the session before the Reserve Bank of India stepped in to stem the slide. The central bank's intervention, executed through state-run banks, helped the rupee pare some losses, but it remained under intense pressure. Brent crude oil prices surged past $125 a barrel, reaching levels not seen since 2022, compounding the economic risks for India, a net energy importer. The resurgence in oil prices threatens to upset the delicate balance between inflation and economic growth, while also sapping capital flows from the country. The rupee's decline has been relentless, with the currency logging its third consecutive weekly decline.

Central bank on the defensive as currency slides

The Reserve Bank of India has been forced back onto the defensive, deploying its forex reserves and policy tools to curb speculative attacks on the rupee. Despite aggressive steps to limit volatility, the currency fell to a record closing low of 94.85 per dollar on Wednesday. The central bank's forward book deficit and rising bond yields have added to the pressure, complicating its efforts to stabilise the currency. Traders noted that the RBI likely intervened on Tuesday as well, when the rupee closed at 94.54 per dollar. The central bank's strategy has been to keep the rupee above the psychologically important 95 mark, but the persistent strength of the dollar and domestic outflows have made that line increasingly difficult to hold. India's forex reserves, which stood at $703 billion, provide a cushion, but the pace of depletion is a concern.

Oil surge and foreign outflows compound rupee woes

The rupee's weakness is being driven by a confluence of external and domestic factors. Surging crude oil prices, exacerbated by stalled efforts to end the Iran conflict and heightened West Asia tensions, have raised India's import bill and widened the trade deficit. Local importers, fearing further depreciation, have been aggressively hedging their dollar exposure, adding to the downward pressure on the currency. At the same time, foreign institutional investors have been pulling money out of Indian markets, selling equities and bonds amid a hawkish turn by the US Federal Reserve. The persistent foreign selling has drained capital inflows that would otherwise support the rupee. The combination of oil-driven demand for dollars and portfolio outflows has created a negative feedback loop, with each leg of weakness reinforcing the other.

Analysts flag further downside to 96-97 levels

Market analysts see little respite for the rupee in the near term, with many projecting a slide to 96-97 per dollar. The currency's record low has broken key technical levels, and the outlook remains bearish as long as oil prices stay elevated and the Fed maintains its hawkish stance. The rupee opened at 95.02 per dollar on Thursday, down 17 paise from the previous close, and quickly breached the 95 mark. The last time the rupee crossed 95 was in March, when it hit a then-record low of 95.21. Since then, the currency has been on a downward trajectory, punctuated by brief periods of stability when the RBI intervened. However, the central bank's ability to defend the rupee is constrained by the scale of the outflows and the risk of depleting reserves. The special FX credit line offered to state-run oil refiners in mid-April, via the State Bank of India, has seen limited use, according to sources, signalling that even that measure has not fully alleviated the strain.

Policy dilemma: rate hikes loom as inflation pressures mount

The rupee's slide is reshaping India's monetary policy outlook, potentially ending the era of cheap money. The central bank, which has kept interest rates low to support growth, now faces pressure to hike rates to curb inflation and defend the currency. Rising oil prices are feeding through to higher input costs, and second-order effects are beginning to emerge, threatening to push inflation above the RBI's target range. The government's policy response has been cautious, prioritising macroeconomic stability over stimulus. The focus on defence rather than stimulus reflects the gravity of the external shocks, including geopolitical risks and global trade uncertainties. Bond yields have already risen above 7%, reflecting market expectations of tighter policy. A rate hike would further slow the economy, but inaction risks a more disruptive currency crisis.

Outlook: currency under siege as global headwinds persist

The Indian rupee is likely to remain under pressure in the coming weeks, with the trajectory of oil prices and the Fed's policy decisions being the key swing factors. The RBI's intervention can smooth volatility but cannot reverse the fundamental forces at play. The currency's record low has put the central bank back on the defensive, and the forward book deficit suggests that its capacity to intervene may be waning. The broader implications for India's economy are significant. A weaker rupee makes imports more expensive, stoking inflation and squeezing corporate margins. For a country that imports over 80% of its oil, the combination of a falling currency and rising crude prices is a double blow. The government and the central bank will need to navigate carefully between supporting growth and maintaining stability, with no easy options ahead.

The bottom line

• The rupee hit a record low of 95.33 per dollar, driven by surging oil prices and persistent foreign outflows.
• The RBI intervened to defend the 95 mark, but analysts see further downside to 96-97.
• Brent crude oil prices crossed $125 per barrel, exacerbating India's trade deficit and inflation risks.
• Foreign institutional investors have been selling Indian assets, adding to the currency's weakness.
• India's forex reserves of $703 billion provide a buffer, but depletion is a concern.
• The rupee's slide may force the RBI to hike rates, ending the cheap-money era and slowing growth.