The Indian rupee fell to a lifetime low on Tuesday, weighed by intensifying external pressures, with the prolonged Iran conflict driving a sustained surge in oil prices and pushing US Treasury yields higher.
The rupee slumped to a record closing low of 96.5325 per dollar, compared with the 96.3450 level it settled at on Monday.
The currency also dropped to 96.60 per US dollar, slipping past the previous lifetime low of 96.3875 hit on Monday. The currency’s losses since the Iran war broke out in late February now total 6%.
The combination of high crude prices, underpinned by the prolonged U.S.-Iran impasse, and subdued capital inflows is widening India's external imbalances and leaving the rupee vulnerable.
Economists expect India's current account deficit to widen significantly in the current fiscal year. A potential hit to remittances from the Middle East and expectations of subdued portfolio flows on rising concerns over India's growth outlook could add to external sector pressures.
India's balance of payments is set to widen to a deficit in the range of $65 to $70 billion this year, economists estimate, marking a third straight year of deficits and underscoring persistent external sector pressures.
India "faces a two-fold challenge...to lower the current account deficit and attract capital inflows that are sustainable," HSBC said in a note.
"The continued distribution of FX market pressure between currency weakness (which can lower the trade deficit over time) and FX reserve use should help."
High oil prices are already feeding through to India's external and inflation dynamics.
The merchandise trade deficit widened to $28.38 billion in April, driven largely by a surge in crude oil imports to a six-month high.
At the same time, April wholesale inflation accelerated to its highest level in three-and-a-half years, underscoring the pass-through of higher energy costs.
Prime Minister Narendra Modi's recent calls to conserve fuel and foreign exchange highlight the scale of pressure on the economy.
U.S. YIELDS ADD TO PRESSURE
The recent surge in U.S. Treasury yields, driven by inflation concerns, is further complicating the outlook for the rupee. The U.S. 10-year yield climbed to its highest level in a year, before easing on Tuesday, with investors increasingly pricing in the possibility of a Federal Reserve rate hike this year.
This is likely to make it more challenging for India to attract the capital inflows needed to finance its current account deficit, according to analysts.
