Rupee At Record Low: Oil-Dollar-War Trap Outweighing RBI's Countermoves?

Rupee at 95: Think of a tug-of-war scene with Indian rupee at the centre. On one hand is the Reserve Bank of India (RBI) trying to shield rupee's value. And on the other side are US dollar, Iran war disruptions, and crude oil -- all trying to pull the Indian currency down. At the moment, the oil-dollar-war trio seems to be winning.

On Thursday, the cumulative impact of the trio brought Indian rupee to its record low of 95.20 against the dollar. Just a day earlier, the rupee had closed at 94.88 (also an all-time low then).

Let's understand the 'trifecta-effect' first:-

Crude Oil: Brent crude is hovering around $122 per barrel. For an oil-import dependent country like India, that is immediate pressure on the import bill and on the rupee.

US Dollar: The dollar index is holding firm after the pause in rate cuts by the Federal Reserve, making emerging market currencies less attractive.

War: With no end to the Iran war in sight, the Strait of Hormuz disruption is likely to persist. This strait served as a critical route for India's energy supply. Also, the war is pushing investors toward safe-haven assets like the US dollar.

Domestic markets reflect this trifecta-induced stress. The Sensex fell over 800 points in early trade on Thursday, while the Nifty dropped nearly 250 points. Foreign Institutional Investors sold equities worth Rs 2,468.42 crore on Wednesday alone.

"From an investor's perspective, a falling rupee is a double-edged sword that demands a strategic shift toward diversification. While it triggers 'imported inflation' that can hurt domestic consumption and squeeze margins for import-dependent firms like those in the electronics or aviation sectors, it provides a massive tailwind for export-oriented powerhouses like IT and Pharmaceuticals, which earn in stronger US dollars," said Abhishek Bhilwaria, AMFI-registered MFD.

He added, "The risk of foreign capital flight and potential interest rate hikes by the RBI can create short-term turbulence in the stock and bond markets. However, for those holding gold or international mutual funds, the currency slide actually boosts portfolio value through favorable conversion rates, acting as a natural hedge against domestic volatility."

Now, let's understand how the RBI is trying to protect rupee's value. 

Back in 2022, the Reserve Bank of India created a framework to settle international trade in rupees. At that time, it looked like a long-term strategic experiment. Today, it is acting as a small but meaningful cushion.

In February alone, Indian traders settled Rs 14,057 crore worth of imports in rupees. That translates to roughly $1.5 billion in foreign exchange saved in just one month. Over time, the numbers are getting larger.

While 2.35 per cent may look small, at a time when the rupee is under extreme pressure and India runs a $119 billion trade deficit, every dollar saved matters.

Exports are also being settled in rupees. The gap between rupee-settled exports and imports has narrowed sharply, meaning more countries are willing to accept rupees for trade.

Banks from 30 countries - including Germany, Israel, Malaysia, New Zealand, Oman, Russia, Singapore and the UK - have been allowed to open rupee accounts with Indian banks.

India has also signed local currency trade frameworks with UAE, Indonesia and Maldives, apart from long-standing arrangements with Bhutan and Nepal. Sri Lanka has added the rupee to its list of designated foreign currencies.

Deputy Governor T Rabi Sankar recently reiterated that the central bank's long-term commitment to rupee internationalisation remains intact.

The Iran conflict could accelerate the use of non-dollar currencies in oil trade. While the dollar's dominance is far from over, countries are clearly preparing alternatives. India's rupee trade push fits into this larger global shift.

So, Where Does The Rupee Go From Here?

In the short term, the direction depends on:

• Crude oil prices
• Dollar strength
• FII flows
• Geopolitical developments

In the medium term, the RBI's rupee trade settlement framework, growing acceptance of rupee accounts, and gradual diversification away from dollar dependence can reduce the intensity of future shocks. 

"The recent depreciation of the Indian rupee has a number of domestic and international causes, and its effects are felt by households, businesses, and investors... A weaker rupee increases import costs, which increases domestic costs and may contribute to high inflation... It is best to be prudent and keep a wait-and-see approach. Being prudent means, you need to be more diversified, which means exporting stocks from other countries," said Siddharth Maurya, Managing Director, Vibhavangal Anukulkara.

The rupee's fall to 95 is a warning signal. But behind the scenes, a slow structural change is underway that could make such falls less painful in the years ahead.