The Indian rupee continuing its long downward spiral from last year with geopolitical tensions linked to the Iran conflict pushed crude oil prices higher and are triggering capital outflows. The rupee was trading near 92.44 against the US dollar, close to its record low, with the Reserve Bank of India stepping in intermittently to smooth volatility.
This has raised concerns over how far the currency could weaken if the situation persists. Goldman Sachs is already seeing the pressure is likely to persist with its analysts saying the currency could weaken to around 95 over the next year. The brokerage has already trimmed India’s growth forecast to 6.5% and raised its inflation outlook, reflecting the impact of higher oil prices.
The core issue is India’s structural dependence on imported energy. As oil prices rise, the import bill expands sharply, widening the current account deficit and exerting downward pressure on the currency.
Arpit Jain of Arihant Capital Markets said the risks are already visible. He noted that every $10 increase in crude prices can add roughly 0.4-0.5% to the current account deficit. “If oil prices remain elevated, the CAD could move closer to the 3% mark, which would fundamentally weaken the rupee,” Jain said.
Alongside this, continued foreign institutional investor outflows and a stronger US dollar are compounding the pressure. The question now is whether the rupee could slip further towards the psychologically important 100 mark.
Paresh Bhagat of Veer Growth Fund and Chairman at Mangal Keshav Financial said such a move cannot be ruled out in a severe scenario. “If the Iran conflict causes a serious disruption in energy supplies and crude sustains above $120, pressure on India’s external position could increase meaningfully,” he said.
India imports nearly 89% of its oil, and every $10 rise in crude can add about $15 billion to the import bill, widening the current account deficit by around 0.5% of GDP.
A prolonged oil shock, combined with weaker capital inflows, could therefore create conditions for sharper currency depreciation. However, Bhagat also pointed out that the extent of the move would depend on how long the disruption lasts and how the RBI responds.
Other markexperts see the downside risk as more contained in the near term. VK Vijayakumar of Geojit Investments said the rupee’s movement will be closely linked to crude prices. “Rupee declining to 95 is likely if Brent goes beyond $120 and remains there for many days,” he said, adding that such a scenario would also trigger imported inflation, prompting the RBI to intervene actively in the forex market.
A contrarian view is that a move to 100 is not imminent unless extreme conditions play out. Independent market expert Adib Noorani said the rupee is currently caught in a “perfect storm” of high oil prices and foreign portfolio outflows, but strong domestic fundamentals continue to offer support.
He expects the currency to test levels around 93.5 in the near term, with resistance likely to emerge, and does not see a move towards 95 or beyond unless oil prices surge above $130 for several weeks or capital outflows accelerate sharply.
All eyes on RBI
The RBI’s role remains critical in this environment. While the central bank typically does not defend any specific level, it has historically intervened to prevent disorderly movements and curb excessive volatility. With inflation still relatively contained, policymakers may initially tolerate gradual depreciation, but a sustained slide driven by oil and external shocks could force a more active response.
In the near term, most analysts agree that the bias for the rupee remains on the weaker side, with 95 emerging as a realistic stress level if crude prices remain elevated. A move towards 100, while not the base case, is increasingly being seen as a tail risk linked to a prolonged and severe escalation in the Iran conflict.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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