Nimesh Vohra
MUMBAI, May 19 (Reuters) – The Indian rupee fell to a record low on Tuesday as external pressure intensified, as the protracted conflict with Iran fueled a continued surge in oil prices and pushed up U.S. Treasury yields.
The rupee fell to 96.44 against the dollar, falling below the all-time low of 96.3875 hit on Monday. The currency’s losses total 6% since the outbreak of the Iran war in late February.
With crude oil prices remaining high, supported by the protracted standoff between the United States and Iran, and coupled with reduced capital inflows, India’s external imbalances are widening and the rupee has become vulnerable.
Economists expect India’s current account deficit to widen significantly this fiscal year. A possible hit to remittances from the Middle East, coupled with expectations of weaker portfolio flows on rising concerns over India’s growth prospects, could add to pressure on the external sector.
Economists estimate India’s balance of payments deficit will widen to $65 to $70 billion this year, marking its third consecutive year of deficit and underscoring ongoing external sector pressures.
HSBC said in a report that India “faces the twin challenges… of reducing the current account deficit and attracting sustainable capital inflows”.
“The continued distribution of FX market pressures between currency weakness (which can reduce trade deficits over time) and the use of FX reserves should help.”
High oil prices have affected India’s external and inflationary dynamics.
The merchandise trade deficit widened to $28.38 billion in April, mainly due to a surge in crude oil imports to a six-month high.
Meanwhile, wholesale inflation accelerated to its highest level in three-and-a-half years in April, underlining the pass-through effects of higher energy costs.
Prime Minister Narendra Modi’s recent calls to save fuel and foreign exchange have highlighted the scale of the economic pressure.
Adding pressure on U.S. yields
The latest surge in the U.S., driven by inflation concerns, further complicates the outlook for the rupee as U.S. Treasury yields rise. The yield on the 10-year U.S. Treasury note climbed to its highest level in a year, before retreating on Tuesday as investors increasingly factored in the possibility of the Federal Reserve raising interest rates this year.
Analysts said this could make it more challenging for India to attract the capital inflows needed to finance its current account deficit.
(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala and Janane Venkatraman)