Rupee weakens as 5 reasons from oil to outflows build pressure

Dubai: India’s rupee has slipped to fresh lows recently, breaching the 94 mark against the US dollar and marking its weakest level in four years. The move reflects a convergence of global and domestic pressures that are weighing on the currency at a time of heightened geopolitical uncertainty.

The latest drop came alongside a broader risk-off sentiment across markets, with investors reacting to escalating tensions in the Middle East and the growing likelihood of a prolonged disruption to global energy flows.

Rising crude prices remain the most immediate trigger behind the rupee’s decline. India relies heavily on imported oil, with a large share of shipments passing through the Strait of Hormuz, making it highly exposed to disruptions in the region.

A sustained increase in oil prices widens India’s import bill, putting pressure on the current account and weakening the currency. Central bank estimates suggest that even a 10% rise in crude can slow growth and push inflation higher, compounding the strain on the economy.

Samer Hasn, Senior Market Analyst at XS.com, said the current environment leaves the rupee particularly exposed.

“The US dollar surged to new record highs against the Indian rupee, with the rupee crossing the 94-dollar mark amid escalating tensions in the Middle East.”

The pressure is not limited to oil markets. Prolonged conflict risks disrupting key supply chains, including those tied to agriculture. India’s farming sector depends on petrochemical inputs such as fertilisers, which are sensitive to energy prices and supply disruptions.

“The conflict focuses on the Strait of Hormuz. Since most of India's energy imports pass through this strait, India could be among the most affected globally by a prolonged war,” Hasn said.

He added that the knock-on effects could spread across sectors, amplifying the impact on growth and currency stability.

Another layer of pressure is emerging from the Gulf, where economic uncertainty is beginning to affect remittance flows from Indian expatriates. Any slowdown in inflows reduces a key source of foreign exchange support for the rupee.

At the same time, global investors have been pulling money out of Indian markets. Equity outflows have crossed billions of dollars this year, while debt markets have also seen sustained selling, reducing demand for the rupee.

The broader strength of the US dollar is intensifying the decline. Expectations that interest rates may stay higher for longer are supporting the dollar and making emerging market currencies less attractive.

The Reserve Bank of India has already been active in the market to smooth volatility, but sustained external pressures are limiting its ability to stabilise the currency.

Market positioning is also playing a role. Investors are moving toward safer and more liquid assets, particularly during periods of geopolitical stress. This shift is accelerating the rupee’s decline.

“This combination of rising energy prices, risks to agricultural output, and an uncertain global investment climate is exerting further downward pressure on the rupee,” Hasn said.

He warned that the pressure could persist if tensions continue to escalate.

“The severe pressure on the rupee might persist for the rest of the year, making the 100 threshold for USD/INR a possible short-term target.”

A weaker rupee has direct implications for households. Import costs rise, which can feed into higher prices for fuel, food and other essentials. Overseas travel and education become more expensive, while remittances from abroad gain value when converted into rupees.

With no clear resolution in sight for the geopolitical tensions driving markets, the rupee is likely to remain under pressure, keeping both policymakers and consumers on alert in the weeks ahead.

- With inputs from Bloomberg.