Risk of significant fall in Indian rupee increases, analysts say

MUMBAI (Reuters) – The rupee rose slightly against the U.S. dollar on Monday, but rising oil prices and a rally in the dollar index suggest a growing risk of a significant drop in the local currency, analysts said.

The rupee was last trading at 83.1450 per US dollar, down from 83.1850 in the previous session. The Reserve Bank of India has intervened periodically to ensure that the rupee does not fall below the all-time low of 83.29.

“The RBI will be there to defend the rupee and ensure that overall volatility is contained,” said the head of foreign exchange sales at a private sector bank.

“But you can’t help but think that the probability of a new low has increased,” the executive said, pointing to oil prices and the rebound in the dollar.

Brent crude is up 8.5% this month and nearly 26% in the current quarter on supply concerns.

The oil production cuts that Saudi Arabia and Russia have extended will mean a substantial market deficit during the fourth quarter of the current year, the International Energy Agency said last week.

Brent crude is at $94.60, its highest level since November 2022.

“Depreciation pressures on the INR are expected to be higher in the near term with crude oil prices above $90 and dollar strength,” Gaura Sen Gupta, economist at IDFC First Bank, wrote in a note.

The dollar index, supported by expectations that the US Federal Reserve will keep rates high for longer, hovers around its highest level since March.

Higher oil prices could widen India’s oil trade deficit and affect the overall deficit. India’s trade deficit in August widened to a 10-month high of $24.2 billion.

“This is an adverse terms of trade shock for Asia, as most Asian economies are net oil importers,” Nomura said in a note on Friday.

“India, Thailand and the Philippines appear more vulnerable to rising oil prices.”

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