Rupee Falls To All-Time Low As Iran War Rages On: Is It All Bad?

Impact of Iran War on Indian Economy: The Indian rupee has been struggling to hold its value against the mighty US dollar, particularly since the beginning of the Iran war on February 28. It slipped to a fresh record low this week, tracking the broader stress in global markets amid inflation concerns due to the disruption at the Strait of Hormuz.

On Wednesday, the currency opened at 92.43 against the US dollar, weaker than Tuesday's close of 92.37. Later in the day, the rupee slumped 20 paise to a new low of 92.63 against the US dollar. The previous low of 92.40 was touched on Monday itself. FOLLOW LIVE UPDATES

It's obvious for people to fear further decline in the rupee value as a sliding currency raises inflation concern. People looking to travel abroad or engaged in imports are among the worst hit. However, the situation this time is not entirely one-sided.

Why Is The Rupee Falling? 

Over the past two weeks, the Iran war has set off a chain reaction. Oil and gas markets have been hit due to the disruption in supply. Consequently, crude prices are firming up -- a big worry for India.

Remittances from the Middle East could soften if the slowdown deepens. Besides, export demand from the Guld region is also at risk. This is particularly important as UAE is the second biggest consumer of Indian goods after the United States. A drop in demand will directly widen our current account deficit.

Apart from Iran war shocks, the currency is also reacting to capital flows. When global uncertainty rises, investors tend to pull back or demand better valuations. That shift shows up quickly in currency markets. The rupee adjusts. The dollar (usually) gains.

Rupee Fall Not All Bad?

The rupee's adjustment (as mentioned above) does something important. A weaker rupee makes imports more expensive. This, in turn, pushes consumers and firms to cut back on foreign purchases and look at domestic options. Simultaneously, exporters get an edge because their goods become cheaper in global markets.

And for sectors linked to global prices, like metals, the benefit is more direct. Revenues rise in rupee terms when the exchange rate moves. In effect, the currency starts doing part of the heavy lifting.

Sharing his insights, Akshay Chinchalkar, Managing Partner and Head of Markets Strategy at the Wealth Company, said, "The rupee's slide often triggers panic, but in the context of the ongoing conflict, it's also doing exactly what it's supposed to."

He added, "When war disrupts oil supply, squeezes remittances, and dampens export demand - all at the same time - the economic impact is multi-pronged. A weaker rupee acts as the economy's shock absorber and here's how - exporters want to export more as they can earn more rupees on USD conversion, importers want to import less which means they look for domestic substitutes, and domestic industry gets a breathing room it wouldn't have under a strong currency that makes foreign goods cheaper to buy."

Fall In Rupee: Harder To Ignore Downsides

The arguments, however, does not hold indefinitely. India imports most of its crude, and those payments are in dollars. When the rupee weakens, the import bill rises. That feeds into costs across sectors and eventually shows up in inflation.

Chinchalkar flagged this risk as well. "The "stabilizer" narrative its outer limits. India's oil import bill is dollar-denominated, so a drop in the rupee actually worsens the very channel it's trying to offset. Input costs rise, inflation follows, and the RBI faces a classic dilemma - defend the rupee or protect growth."

There is also the question of how global investors read such moves. Bruce Keith, CEO Cofounder, InvestorAi, said, "Fall in rupee making imports expensive is a blinkered, myopic view of the world. It is generally put forward by struggling politicians. Taken in isolation, the statement is not wrong, but it misses the context - this is not managed depreciation but a systemic shock. It reflects the relative impact and makes the country a less attractive global investment destination."

Keith added, "Sudden currency moves caused by external shocks tend to whipsaw back when conditions change rather than creating a long-term benefit for any party. Finally, the statement ignores the operational reality as export heavy businesses use FX hedging to ensure their bottom lines are not impacted by currency moves."

Rupee Needs A 'Well-Oiled' System

As the macro fundamentals of the country are strong, the rupee hinges on one variable at present - oil. What happens next depends less on the currency and more on the conflict itself.

If the Middle East situation stabilises soon and oil prices cool off, the rupee's fall could end up cushioning the economy more than hurting it. If not, the math changes quickly.

Keith put it plainly: "The net effect this time will rely heavily on how long the conflict lasts and how far oil spikes. If the war ends soon, the rupee adjustment is net positive. If the war prolongs and Brent goes past $120? That will overwhelm the stabiliser effect. In summary, the rupee's weakness has some merits but it's in no way a silver bullet. The context of the macros driving its move is the key variable."