Foreign exchange traders said the Reserve Bank of India intervened by selling dollars, helping limit the rupee’s fall.

Illustration: Dominic Xavier/Rediff

The rupee plunged to a fresh low of 93.72 against the dollar on Friday, falling 1.15 per cent in a single session — its sharpest one-day decline since February 24, 2022 — as elevated crude oil prices and strong dollar demand from oil-marketing 
companies and foreign portfolio investors (FPIs) weighed on the currency.

It touched an intraday low of 93.77.

How the rupee fared so far

The rupee has depreciated 8.8 per cent so far this financial year, the most since FY14, when it had weakened 9.37 per cent.

In March alone, it has declined 2.92 per cent so far.

Foreign exchange traders said the Reserve Bank of India intervened by selling dollars, helping limit the rupee’s fall.

They added that the currency could have weakened to 95 without this intervention, estimated at $4 billion to $5 billion.

The price of the Indian crude oil basket rose to around $156 a barrel, adding to pressure on the domestic currency.

Since the start of the West Asia crisis, the price of the Indian crude basket has jumped 120 per cent.

Meanwhile, the dollar index, which measures the greenback against a basket of six currencies, was up 0.35 per cent at 99.58.

Why the rupee slumped on March 20

“The rupee’s move on Friday was entirely driven by the surge in energy prices.

“As the war escalates and production sites come under attack, the threat to energy supplies — both Brent and liquefied natural gas — is rising,” said Abhishek Goenka, founder and chief executive officer, IFA Global.

Apart from surging crude oil prices, which threaten to widen the current account deficit, a ballooning short forward book has also weighed on the currency.

“Market participants came to know that the RBI had $107 billion in oversold positions as of mid-March, which it will have to buy back in the coming days, although at least 30 per cent of these are for maturities of more than two years,” said Anil Kumar Bhansali, executive director and head of treasury, Finrex Forex Advisors.

The dollar deficit in the forward book stood at $68.4 billion at the end of January.

When these positions start maturing, the RBI will have to buy large amounts of dollars, which will increase demand for the currency.

This creates more downside risk for the rupee, meaning it would be more likely to weaken than strengthen, even if the war ends sooner than expected, Bhansali added.

“It seems the RBI has limited ammunition to protect the rupee, given that it is already short around $100 billion in forwards across non-deliverable forward and onshore markets combined,” Goenka said, adding that the central bank might want to use its ammunition judiciously, given the uncertainty around how long the war would continue and risks to energy supply.

Foreign fund outflows also weighed on the currency, experts said.

“Both FDI and FPI outflows are weighing on the financial account.

“In particular, we note that one of the factors contributing to the negative FPI picture is the weak foreign sentiment on Indian equity markets,” Barclays said in a note.

“Since the onset of the West Asia conflict, equity outflows have accelerated ($8.4 billion month-to-date), while FAR bond flows have also turned negative (-$836 million month-to-date), both of which have contributed to renewed pressure on the rupee.”

The note added that in the current environment, the prospects of a sustained rebound in equity capital inflows remained weak.

What dealers say

Dealers said the Indian currency was likely to remain under pressure and that the central bank could only slow the pace of depreciation rather than reverse the direction.

The rupee is expected to trade with a negative bias, as escalating geopolitical tensions and rising crude oil prices may continue to pressure the currency, said market participants.

Going forward, the rupee is likely to trade in the range of Rs 93.20-93.80 a dollar.