If the conflict in Iran persists, the Indian rupee could fall to a record level of 100 or lower against the US dollar. Strategists have warned that the rupee has already depreciated by approximately 10% over the past year, and efforts by authorities to curb the decline may only provide temporary relief.
Analysts from Wells Fargo and Van Eck Associates Corp. indicated that high oil prices would exacerbate inflation and widen the current account deficit, thereby accelerating the rupee's depreciation. The options market aligns with this view, with pricing suggesting further downside for the rupee and reflecting expectations of a move toward 100.
This year, the rupee has been one of the worst-performing currencies in Asia. Its persistent decline has prompted the Reserve Bank of India to implement one of its most significant measures in over a decade. The central bank introduced new regulations capping banks' net open positions in the domestic foreign exchange market at $100 million at the end of each trading day. This move is intended to force banks to reduce their holdings, thereby limiting their ability to engage in large-scale one-way bets against the rupee.
However, Monday's price action highlighted the limitations of these measures. Following the announcement of the restrictions, the rupee initially appreciated by 1.4% at the open but quickly reversed course, hitting a new low of 95.125 during the session. Markets were closed on Tuesday for a holiday.
"USD/INR at 100 is no longer a tail risk. If current conditions persist, it becomes a tangible pressure scenario," said Ahmed Azzam, Head of Financial Markets Research at Equiti Group. "The latest measures appear more like a short-term stabilization tool rather than a structural solution."
Nick Twidale of AT Global Markets noted that despite the new restrictions, bearish bets against the rupee continue to appear on the company's trading platform, suggesting that some investors are not taking the central bank's actions seriously.
"As long as the war continues, a move toward 100 or lower for the rupee is almost a certainty," the senior FX trader stated. "The RBI will try to prevent the rupee from weakening, but the macro environment will ultimately dominate. The rupee will reverse one day, but it won't be the central bank that decides; it will be the market."
Data compiled by Bloomberg shows that options pricing reflects traders assigning about a 13% probability of USD/INR reaching 100 by the end of June, with this probability rising to approximately 41% by the end of the year.
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