The rupee tumbled the most in eight months on Thursday as the dollar strengthened against major global currencies after Russia invaded Ukraine, sending crude oil prices over $100 per barrel.
Several banks started buying dollars on behalf of oil-marketing companies as Brent crude surged past the $100-mark, further weighing down the Indian currency. The rupee fell 1.4 per cent against the greenback, or 109 paise. The currency closed the day at 75.65 to a dollar – its lowest since December 20, 2021.
“The rupee fell sharply in Thursday’s session as tensions between Russia and Ukraine reached boiling point. Reports of Russia invading Ukraine upset the overall market sentiment and led to weakness in riskier assets as well. Safe-haven assets like gold, silver, and the Japanese yen induced buying interest,” said Gaurang Somaiya, foreign exchange (forex) and bullion analyst, Motilal Oswal Financial Services.
According to currency dealers, the rupee gained against the dollar in recent weeks due to positive sentiment as some of the initial public offerings of Indian companies, including the country’s largest insurer Life Insurance Corporation of India, were scheduled to hit the market in March.
Currency dealers said since the rupee was appreciating in recent times, a steep fall was inevitable when a risk-averse situation arises. After Thursday’s fall, the rupee is the worst-performing currency in Asia in 2022, barring the Japanese yen.
Dealers said the central bank intervened in early trades to reduce volatility rather than reverse the trend after the rupee opened weak at 75.15. The Reserve Bank of India (RBI) always maintains that it intervenes in the currency markets to reduce volatility and not to target any level.
“As soon as the rupee opened, the RBI came in. In such instances, the RBI usually comes in not to reverse the trend but to slow things down. There is no point working against the market forces when the forces are so strong,” said Imran Kazi, vice-president–risk advisory, Mecklai Financial Services.
“If tensions continue for some days, things could get worse for the rupee. It can breach 76 to a dollar and even reach 76.3-76.4 per dollar levels,” said Kazi, adding, “No other economic factor will now be looked at… only how the war pans out,” indicating the geopolitical situation could be the only driving force for the rupee in the near term.
“More updates on the escalation between the two nations could keep the rupee weighed down. We expect the spot dollar-rupee to trade with a positive bias and quote in the range of 75.5-76.2,” said Somaiya.
The only silver lining for the currency is if the Organization of the Petroleum Exporting Countries decides to step up oil production, bringing down crude oil prices from the present-day levels. Oil prices surged past $100 per barrel on Thursday for the first time since 2014. High oil prices weigh on domestic currency since India imports more than 80 per cent of its oil requirements.
India’s macroeconomic fundamentals are much stronger than 2013-14 when the US Federal Reserve’s taper tantrums led to a currency crisis. The current account deficit at 1.3 per cent of gross domestic product is within manageable limits. In addition, the country has around $630 billion of forex reserves that can cover at least 15 months of imports.
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