Moneycontrol Pro Panorama | Rupee at 92: Paying the price of a war we didn’t start

Read Time:4 Minute, 1 Second

In this edition of Moneycontrol Pro Panorama: Rupee crash adds to woes amid worsening global environment. This will have cascading effects on the economy

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

The rupee’s fall past 92 against the US dollar is the market’s blunt verdict on Indian economy’s deep vulnerability to oil shocks delivered by war in the Middle-East. We are subject to the whims of global oil price movements, not surprising considering that the country imports oil to meet about 85 percent of its needs. The unfortunate part is that this happens every single time the oil markets seize up. Here is an interesting take by my colleague Aparna Iyer on what West Asia could do to the rupee in bad times.

Some numbers for perspective: Brent has surged to around $85 a barrel following the joint US–Israel strikes on Iran and Tehran’s retaliation. The closure of the Strait of Hormuz, through which nearly 40 percent of India’s energy imports pass, has undoubtedly transformed a geopolitical flashpoint into an economic threat. Investors, as always, have fled to the safety of the US dollar. Logically, emerging market currencies have taken a hit.

At 92.17 to the dollar, compared with 91.40 in the previous session, the rupee’s fall may appear incremental, but it is not. Currency moves at these levels quickly seep into the real economy. India’s dependence on oil imports means a weaker rupee magnifies the oil bill even if global prices stabilise. In other words, every incremental depreciation in the rupee pushes up the landed cost of fuel.

A falling rupee can add to the economy’s inflation woes as well. Transport costs rise. Fertiliser subsidies swell. Input costs for a range of industries can escalate and this can have cascading effects elsewhere. As I wrote in a separate piece today, the hard-won moderation in retail inflation comes under strain if the war prolongs. For households already grappling with uneven income growth, another bout of price pressure will hurt consumption.

Against this backdrop, the Reserve Bank of India-led MPC now faces a delicate balancing act. Defending the rupee aggressively through rate hikes would risk derailing the fragile recovery in credit and investment. But not doing so could unsettle markets and trigger high inflation expectations.

What does the outlook look like?

Logically, equity and debt markets will adjust in their own way. The Sensex and Nifty are already bearing the brunt of the war. Companies with unhedged dollar liabilities will feel the strain. Foreign investors can turn even more cautious. A widening current account deficit is almost inevitable if oil stays expensive, adding another layer of pressure.

What can the government do at this juncture?

The fiscal side offers little comfort. If the government cuts fuel taxes to soften the blow to consumers, revenue takes a hit. If it refrains, inflation stays elevated and demand weakens. It’s a tightrope walk.

To be sure, there is no rupee crisis yet. Indian economy is relatively stronger now compared with past crisis situations. But the latest episode highlights that the economy remains deeply exposed to events outside of its control. The solution? Move more aggressively towards renewable energy and diversify existing energy sources.

Investing insights from our research team

Which beaten down stocks merit attention as war risk premium spikes?

Sedemac Mechatronics IPO: Strong technology, stretched valuation

GNG Electronics: Is this a cyclical spike or a structural reset?

Tracker

Pro Economic Tracker | Auto sales, consumer sentiment improve, labour participation falls

What else are we reading?

History shows West Asia can burn rupee more than any other geopolitical clash

Aluminium and steel prices feel the heat from Middle-East crisis

Can the Middle-East war undo MPC’s hard-won inflation gains?

Chart of the Day | Credit card euphoria fades — growth slows to a crawl

‘Widow maker’ markets in the spotlight