Rupee faces pressure amid rising oil prices and geopolitical tensions

The Indian rupee is under considerable pressure as tensions in West Asia escalate, particularly with the ongoing Israel-Iran conflict. This has led to a surge in global crude oil prices, which are now trading above $83 per barrel. As India is a major oil importer, rising oil prices directly affect the rupee’s value and exacerbate inflation concerns.

In early trade on June 16, the rupee fell 6 paise to 86.17 against the US dollar, reflecting the broader market’s reaction to the geopolitical turmoil. Analysts attribute the rupee’s decline to not just the rising oil prices but also to a strong US dollar and outflows from foreign institutional investors (FIIs).

The geopolitical uncertainties, combined with the surge in oil prices, are putting further pressure on India’s currency, which had already been struggling due to global economic factors.

Crude prices: A key factor for the rupee

The sharp rise in crude oil prices, driven by escalating tensions in West Asia, has become a major concern for the Indian economy. Oil prices surged nearly 13 per cent in a short span, and this is having a direct impact on the Indian rupee, a currency that is particularly vulnerable to fluctuations in oil prices due to India’s reliance on crude imports.

Kranthi Bathini, equity strategist at WealthMills Securities, told Moneycontrol that a sustained rise in oil prices could disrupt India’s inflation trajectory, which had recently been helped by a six-year low in consumer price inflation (CPI) at 2.8 per cent in May.

A surge in oil prices could cause inflation to pick up again, forcing the Reserve Bank of India (RBI) to reassess its accommodative stance on interest rates. A more hawkish RBI stance could further weigh on the rupee, making it more expensive for importers and affecting India’s trade balance.

Forex reserves provide some cushion

Despite the rupee’s decline, there is some positive news. India’s foreign exchange reserves increased by $5.17 billion, reaching $696.65 billion for the week ending June 6.

This rise in reserves provides a cushion for the rupee and could help the RBI manage the currency’s volatility in the short term. However, the overall outlook for the rupee remains cautious, with the geopolitical situation adding to the uncertainty.

The RBI's ability to manage forex reserves effectively will be crucial if the tensions in the region persist and oil prices continue to rise. Analysts suggest that while the reserves offer some stability, India’s heavy dependence on oil imports means that any sustained spike in crude prices could be problematic for the rupee.

Long-term outlook for the rupee and Indian markets

Looking ahead, analysts remain cautiously optimistic about the rupee’s recovery in the medium term. Some expect the rupee to strengthen to 84 against the dollar by the October-December quarter, citing low domestic inflation and a manageable trade deficit. However, much of this outlook depends on how the geopolitical situation evolves and the movement of crude prices in the coming weeks.

The current volatility in the rupee, triggered by the Israel-Iran conflict and the surge in oil prices, has led to a wait-and-watch approach from investors.

Bathini told Moneycontrol that the market is adopting a cautious stance amid the uncertainty, with a particular focus on how crude prices will impact India’s inflation and economic growth. A sustained rise in oil prices could push inflation higher, forcing the RBI to adjust its policies.

Despite the short-term challenges, Indian equities could offer opportunities for long-term investors if the rupee stabilises and geopolitical tensions subside.

Some sectors, such as defence, infrastructure, and banking, are still seen as attractive due to their growth potential, regardless of the current market volatility. Bathini believes that any correction in the markets, triggered by the ongoing geopolitical risks, could present a good entry point for medium- to long-term investors.

While the rupee faces pressure in the short term due to rising oil prices and geopolitical instability, the Indian economy’s fundamentals and forex reserves provide some resilience. Investors are advised to monitor the evolving geopolitical situation closely, as it will be key to determining the rupee’s trajectory in the coming months.