The rupee suffered a bruising session on Friday, tumbling to an all-time low and breaching the ₹93 mark for the first time. The sharp fall of the currency to ₹93.15 against the dollar in early trade is a direct result of the rising tensions in West Asia, which have created ripples in global energy markets.
The major reason for such a volatile market is the rising prices of crude oil. With Brent crude prices well and truly crossing the $100 a barrel mark, India, being a country that imports a significant amount of energy to meet its requirements, is bound to witness a rising import bill. This rising price of crude oil is resulting in a surge in dollar demand, thereby negatively impacting the rupee. Additionally, the intensifying geopolitical friction in the Gulf has sparked a classic "flight to safety," with global capital fleeing emerging markets in favour of the greenback.
The rupee’s struggle is further being fueled by a large outflow of funds from foreign institutional investors, who are increasingly selling Indian stocks. This represents a double whammy because not only are funds flowing out of India, but they are also being exchanged for dollars. This local issue is being coupled with a hawkish stance by the US Federal Reserve. This is so because cutting interest rates in America is no longer a possibility due to inflation; therefore, the dollar is still a strong currency, and there is little room for any other currency to take a breather.
The effects of a weakening rupee are far-reaching and not limited to just the trading floors. To the common consumer or businessman, a combination of a low currency value and a high oil price is a recipe for imported inflation. A rise in oil and raw materials is expected to permeate the rest of the economy, and the consequences for growth are expected to be negative. All eyes are now on the Reserve Bank of India to see if it will step in to stem the bleeding, though a lot will depend on whether the situation in West Asia is showing any signs of being de-escalated.
Also read: Sensex surges 900 points, Nifty up 260 in early trade
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