The Indian rupee continues to depreciate steadily and is rapidly moving towards the Rs 96 home against the US dollar, setting new records daily. The rupee fell to 95.85 against the dollar in early trade today. This is due to the increase in crude oil prices and large withdrawal by foreign investors from the domestic market. The Indian currency has lost more than 6 percent so far this year, while it has fallen more than 1 percent this week alone. The ongoing conflict between the US and Iran has disrupted traffic through the Strait of Hormuz. As more than 80 percent of India’s energy needs are imported from the Middle East, this situation has put severe pressure on the Indian rupee.
On May 13, the Government of India decided to increase the import duty on precious metals. Import duties on gold and silver were raised from 6 percent to 15 percent, prompting a massive sell-off by investors in the market. A rise in gold prices has a negative impact on the Indian currency, as it increases the country’s current account deficit and India is a major importer of gold. In this regard, Amit Pawari, Managing Director, CR Forex Advisors said, “The timing is no coincidence, the ongoing tensions in West Asia have created fears in the energy market and India’s import burden is increasing rapidly.
Crude oil prices remain high due to supply disruptions through the Strait of Hormuz. Oil is currently trading above $100 per barrel. Brent crude is trading around $106 a barrel and US benchmark West Texas Intermediate is trading around $101 a barrel. High oil prices increase the outflow of dollars, which is very detrimental to India. Experts are speculating that the government may raise petrol and diesel prices in the local market to curb the country’s growing fiscal deficit. Anil Kumar Bhansali, head of treasury at Finrex Advisors, said the government needs to raise fuel prices to save oil companies from losses and keep the fiscal deficit under control.
So far this year, foreign investors have withdrawn more than $22 billion from the domestic market, significantly higher than last year’s withdrawal of $18.9 billion. According to NSDL data, foreign institutional investors have sold $19 billion worth of equity since the conflict escalated in West Asia. According to NSE data on May 13, foreign investors withdrew Rs 4,520 crore from the domestic market. The massive withdrawal raised inflation risks as investors flocked to markets such as South Korea and Taiwan to focus on the rise of artificial intelligence.
“Technically, the 94.50 to 94.80 level is expected to act as a strong support for the rupee, while the 95.80 to 96.00 level stands as an important barrier,” Pawari said. He added that the level of ₹ 96 against the dollar is a playful limit for currency markets. Unless some new factor occurs at the global level or there is a sudden increase in dollar demand due to panic, the Indian currency may not cross this limit immediately.
