Indian currency weakens sharply amid rising Middle East tensions, persistent FII outflows and strong US dollar; economists warn of higher import costs and inflationary pressure
The Indian rupee on Friday breached the psychologically critical 94-level against the US dollar for the first time in history, touching a record low of 94.08 in intra-day trade before closing at 93.95.
This sharp depreciation comes amid escalating geopolitical tensions in the Middle East, heavy foreign institutional investor (FII) selling, and a strengthening US dollar. The rupee has now lost over 3.5% of its value in just the last one month.
Reasons Behind the Historic Fall
- Middle East Crisis: Rising fears of disruption in the Strait of Hormuz due to Israel-Iran conflict pushed Brent crude above $89 per barrel. India imports nearly 85% of its crude oil, making the rupee highly sensitive to oil price movements.
- Heavy FII Outflows: Foreign investors continued their selling spree, offloading Indian equities worth over ₹4,500 crore today. Cumulative FII outflows in February have already crossed ₹18,000 crore.
- Stronger Dollar: The US Dollar Index (DXY) climbed above 108 as investors sought safety amid global uncertainty.
- Widening Trade Deficit: India’s rising energy import bill is further pressuring the current account.
Impact on Economy
A weaker rupee will make imports costlier, particularly crude oil, electronics, and gold. This is likely to push retail inflation higher in the coming months. Economists estimate that every $1 increase in crude oil prices adds nearly ₹8,000–10,000 crore to India’s annual oil import bill.
However, a weaker rupee will benefit exporters, especially in the IT, pharma, textiles, and engineering goods sectors.
RBI’s Stand
The Reserve Bank of India is closely monitoring the situation. Sources indicate that the central bank has been intervening selectively in the forex market to prevent excessive volatility, though it has allowed the rupee to find its market-driven level.
RBI Governor Sanjay Malhotra is expected to address the currency movement in the upcoming monetary policy review.
Market Reaction
- Equity markets reacted negatively, with Sensex falling over 700 points and Nifty slipping below 25,200.
- Gold prices jumped sharply as investors turned to safe-haven assets.
- Banking and import-heavy stocks came under selling pressure.
What Experts are Saying
- The breach of 94 is a major psychological level. If crude stays above $90 and FII selling continues, the rupee could test 95 in the near term, said a senior forex analyst at HDFC Bank.
- While painful for importers, a weaker rupee will provide some relief to exporters who have been struggling with global demand slowdown, noted a report by Motilal Oswal.
The government and RBI are expected to take coordinated steps in the coming days to stabilise the currency and contain inflationary risks arising from expensive oil imports.
