The Indian rupee tumbled to a fresh record low on Monday, hit by a double whammy of rising global bond yields and higher crude oil prices. The toxic mix has added to the stress on emerging market currencies, with India particularly vulnerable due to its heavy reliance on imported energy. The rupee was hit hard by a sharp selloff as foreign capital fled developing markets to safer, higher-yielding American assets. US Treasury yields rose on expectations that the US will keep interest rates high.
The continuing rise in international oil prices aggravates this capital flight. With India importing more than 80 per cent of its petroleum needs, the rising crude prices will only widen the country’s current account deficit and fuel domestic inflationary pressures. Oil importers’ purchases of US dollars to pay for these expensive shipments have severely affected local currency liquidity.
The Reserve Bank of India (RBI) is likely to step in to sell dollars from its foreign exchange reserves to damp down excessive volatility but analysts say central bank intervention may only ease the blow, not reverse the downward trend. The rupee is still vulnerable to further downside risks in the near term as traders remain cautious with hawkish global central banks and geopolitical risks continuing to benefit the greenback.
