Rupee falls 12 paise to 96.42 against US dollar as Middle East tensions push crude above $90

The Indian rupee weakened sharply on Monday, falling 12 paise to 96.42 against the US dollar in early trade. The decline was driven by a spike in global crude oil prices, as escalating tensions in the Middle East stoked fears of supply disruptions.

Brent crude climbed past the $90-a-barrel mark during Asian trading hours. Higher oil prices are a direct headwind for India, which imports over 80% of its crude requirements. A sustained rise in crude typically widens the country's trade deficit and puts additional pressure on the rupee.

State-run banks step in

The rupee opened at 96.41 and immediately slipped to 96.42 against the greenback, according to forex dealers. This marks the currency's weakest level in two months.

Traders said state-run banks were seen offering dollars in the interbank market, likely on behalf of the Reserve Bank of India. The central bank's intervention is aimed at preventing a sharper slide as the rupee inches towards its record low.

Market participants said the RBI's presence was most visible around the 96.40-96.45 zone. The central bank typically sells dollars through public sector banks to shore up the rupee without directly intervening in the market.

Crude above $90 fuels inflation worries

The immediate trigger for the rupee's fall is the surge in crude prices. Escalating conflict in the Middle East has raised the risk of supply disruptions from a region that accounts for roughly a third of the world's oil output.

Brent crude futures were trading above $90 a barrel, a level not seen in recent months. Analysts warned that if tensions escalate further, oil could test higher levels, which would worsen India's terms of trade and push imported inflation higher.

A weaker rupee also makes imports costlier, compounding the inflationary impact of expensive oil. This dual pressure leaves the RBI with limited room to cut interest rates, even as economic growth shows signs of slowing.

Rupee near record low

The rupee's all-time low of 96.50 was recorded in October 2022. Monday's level of 96.42 puts the currency dangerously close to that mark. If the depreciation continues, the RBI may have to deploy more aggressive measures, including direct dollar sales or tightening liquidity.

Forex reserves, which stood at roughly $650 billion, provide the central bank with ample firepower to defend the currency. However, sustained intervention can drain reserves and is rarely a permanent solution.

The dollar index, which measures the greenback against six major currencies, was also firm in early trade, adding to the rupee's woes. Foreign portfolio investors have been net sellers in Indian equities this month, further weighing on the currency.

What to watch

All eyes will be on the trajectory of crude oil and any diplomatic moves to de-escalate tensions in the Middle East. The RBI's next monetary policy meeting in August will also be closely watched for signals on how it plans to balance inflation and growth. For now, the rupee's path hinges on oil prices and the central bank's willingness to keep defending the 96.50 level.