India’s Rupee at Fresh Low as Outflows Accelerate Amid Oil Shock

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(Bloomberg) — India’s rupee weakened to a fresh low, lagging behind regional peers, as foreign investors sped up sales of stocks and bonds on fears that elevated energy prices would drive up the import-heavy nation’s inflation and import bill. 

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The currency fell past the closely watched 94 per dollar mark for the first time on Friday, weakening as much as 0.7%. That takes its decline to almost 4% since the Iran war broke out a month ago. Meanwhile, benchmark yields rose to their highest since July 2024, as the government’s decision to cut taxes on auto fuels stoked concerns of fiscal strain.

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Brent prices are holding well above $100 per barrel after a surge on Thursday, when local markets were closed for a public holiday — far higher than the $70 baseline assumed by the Reserve Bank of India in October. Bloomberg Economics estimates that Brent crude at $100 a barrel and gas 50% above pre-war levels will raise India’s import bill by $5 billion a month.

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The prospect of higher inflation has significantly weakened the rupee, making local-currency denominated assets less attractive to global investors. Overseas investors have pulled $11.5 billion from local stocks this month. They have cut their holdings of the nation’s index-eligible bonds by a record $1.6 billion.

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Uncertainty over the duration of the conflict has darkened the outlook for local assets, complicating the central bank’s task after it stepped up support for both bonds and the currency in the early stages of the war. 

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Interest-rate swaps now signal several rate hikes, even as rising bond yields have already lifted borrowing costs across the economy. Meanwhile, the RBI’s defense of the currency has sharply reduced its foreign-exchange reserves, potentially limiting its ability to intervene aggressively.

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“The RBI’s presence in the currency market has recently been a bit subdued,” said Dilip Parmar, currency analyst at HDFC Securities. “It looks like the central bank is keeping some powder dry because no one knows what will happen next in the war.” He sees the currency breaching the 95 mark if the conflict worsens.

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