Indian rupee
The Indian rupee drops further in the currency markets - will the central bank now stop the drop? Image Credit: Pixabay

Dubai: The Indian rupee hit a one-year low against the UAE dirham on Tuesday at Rs20.59 a dirham. The Indian currency opened at 75.42 a dollar in the interbank forex market and slipped to 75.64.

The Indian currency has been under pressure from last week due to rising oil prices and strengthening of dollar in the international forex markets. The rupee has been on a persistent slide over the past week largely driven by rising crude oil prices.

India imports more than 80 per cent of its domestic oil consumption resulting in a big outflow of foreign exchange to meet the import demand. In addition, the acute coal shortage faced in the country and the high prices of the commodity is also likely to add to rupee’s woes.

As a rule of thumb, every $10 per barrel increase in crude prices leads to an additional $12.5 billion deficit, which is roughly 43 basis points of India’s GDP, according to an estimate by the RBI in 2019. The rupee is also likely to be weighed down by forex outflow resulting from foreign institutional selling on the equity markets.

Market intervention

Analysts expect today’s sharp fall in rupee is an indication that it could go further down to 76 a dollar and beyond. India’s strong forex reserve position at $637.477 billion gives the Reserve Bank of India the option to support the rupee in the interbank forex market in the event of speculation driving down the currency. However, analysts do not expect a large scale intervention in the context of rising import bills.