Kolkata: One of the prominent casualties of the Iran-US conflict, which seems to be escalating, is the Indian rupee, on account of a lot of macro economic concerns from expanding current account deficit, shooting price of crude oil in the global markets and pullout of investments by FIIs. On Wednesday, March 4, the Indian currency slumped to a new low of 92.18 against the US dollar in early trade.
At the interbank foreign exchange market, the rupee opened at 92.05, and then dropped to a low of 92.18 against the greenback. The fall was 69 paise from its previous close. On March 3, Tuesday, the INR was spared the all since the forex market was closed due to Holi. This morning forex traders told the media that rupee will remain under pressure as investors are moving toward safe-haven assets. Moreover, persistent foreign capital outflow from the equities, and fears grow that expensive imports will hurt the trade balance.
Oil import bill
Of all the items that Indian imports, crude oil is the most expensive almost all of it has to be paid in dollars. As the price of rude rises as a direct result of the conflict, India has to pay more and more hard currency to buy crude. As the fastest growing big economy of the world, India is a very energy-hungry economy and imports close to 90% of its crude oil requirements. On Wednesday, Brent crude has risen beyond $82 a barrel which is set to rise as the conflict drags on. Expert agencies have cautioned that a rise beyond &120 a barrel is also not unlikely and it would drain a lot of dollars out of the system, pulling the INR further and further down. Continuous rise in the oil import bill will also reflect in the form of widening current account deficit, which is one of the primary mood-setters in the market.
FII outflow
A direct impact of the military conflict is the fast sellout by FIIs of Indian securities. The more the selling pressure, the more the demand for dollars which will put downward pressure on the rupee. While FIIs have been selling Indian equities over the past few months, on Monday, the offloading reached Rs 3,295.64 crore.
Pressure on GDP
Rising crude prices also have a negative impact on the GDP growth rate. For one, higher crude prices can result n higher rates of inflation in the market which can put pressure on consumption. “Our calculations show that every $10 barrel move in oil prices can raise current account deficit by 0.35% of the GDP, with the impact on inflation (20-30 basis points) contingent on the extent of pass-through to the retail prices,” DBS Bank mentioned in a note.
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