To The Moon

The sharp rise in oil prices is not only raising serious concerns about imported inflation for India, which relies on imports for about 85% of its crude oil needs, but is also directly undermining confidence in its currency market. Market strategists warn that if the conflict involving Iran is prolonged, the Indian Rupee could fall to a record low of 100 or even more against the US dollar. Efforts by Indian authorities to curb the rupee's approximately 10% decline over the past year may only offer temporary relief. Analysts from Wells Fargo and VanEck Consultancy indicate that high oil prices will exacerbate inflation and widen the current account deficit, thereby accelerating the rupee's depreciation. The options market echoes this view, with pricing suggesting further declines for the rupee and signaling market expectations that it is heading toward the 100 level. Year-to-date, the rupee is one of the worst-performing currencies in Asia against the dollar. Its persistent decline has prompted the Reserve Bank of India to implement one of its most aggressive measures in over a decade, capping banks' net overnight open positions in the foreign exchange market at $100 million. This change has forced banks to reduce their position sizes and limited their ability to make large one-way bets. However, Monday's price action highlighted the limitations of such measures: the rupee initially jumped 1.4% at the open due to the restrictions but quickly reversed those gains, hitting a new low of 95.125 later in the day. Markets were closed on Tuesday. "100 per dollar is no longer a tail risk—it's a credible stress scenario if current conditions persist," said Ahmed Azzam, Head of Financial Markets Research at Equiti Group. "The latest measures look more like a short-term stabilization tool than a structural solution." Hopes for an end to the conflict rose after the US President indicated he expected the situation to be resolved within two to three weeks. However, it remains unclear if this timeline is reliable. Furthermore, the recent deployment of additional US troops to the region leaves room for escalation, and the situation could still deteriorate if plans change. Even before the conflict, the rupee was under pressure from a widening external balance and capital outflows. The oil crisis has intensified the strain on the world's third-largest crude importer, and a potential decline in remittances from the Indian diaspora in the Gulf region could further weaken inflows and market sentiment. Against this backdrop, short positions remain firm. Nick Twidale of AT Global Markets noted that even after the latest restrictions, he continues to see persistent short bets on the rupee via their platform, suggesting some investors remain unconvinced by the central bank's efforts. "As long as the conflict continues, a break above 100 and further weakness for the rupee is almost certain," the veteran currency trader said. "The RBI will try to prevent rupee weakness, but the macroeconomic situation will dominate. The rupee will rebound one day, but that will be determined by the market, not the central bank." Options pricing indicates traders see about a 13% probability of the dollar reaching 100 rupees by the end of June, and about a 41% chance by year-end. "The USD/INR forward curve is at its steepest since 2020, suggesting FX traders expect the Indian rupee to remain weak for an extended period," said Bloomberg strategist Mark Cranfield. "Despite the US President hinting at a US exit from the Iran situation, emerging market currency traders believe high oil prices will inflict lasting damage on the rupee." Arulp Chatoumidi, Global Macro Strategist at Wells Fargo, pointed to the 2022 Russia-Ukraine conflict—during which the rupee depreciated about 10% over six months—noting that the current oil supply disruption could be more severe, while the rupee's decline since the outbreak of the Iran conflict has been less than 5% so far. He warned, "If the US-Iran conflict persists until the end of April, a break above 100 for USD/INR is highly likely." Since the conflict erupted in late February, Brent crude prices have surged approximately 44%, reaching a high of $119.50 per barrel. Some analysts warn that if the near-closure of the Strait of Hormuz persists for the next six to eight weeks, oil prices could climb further, potentially to $150 or even $200 per barrel. Chatoumidi added that the RBI's restrictions could drain liquidity from the onshore currency market, raising hedging costs for importers and foreign portfolio investors, while pushing more speculative activity offshore and out of the central bank's control. Given the rupee's weakness even before the conflict—driven mainly by concerns over US-India trade relations, the impact of AI on key service exports, and weak foreign investment—some investors doubt that an end to the Middle East conflict alone would fully stem its decline. "Even if the crisis eventually ends, I expect the rupee to resume its weak performance," said Win Shin, Chief Economist at Nassau Bank 1982 Ltd., a veteran with nearly four decades of market experience. "That is to say, the rupee won't get much respite." As uncertainty over the conflict's duration intensifies, global funds net withdrew approximately $12 billion from Indian equities in March, the largest monthly net outflow on record. Anna Wu, Cross-Asset Strategist at VanEck, stated that India remains "caught in a dilemma," noting its vulnerability to oil shocks and a history of foreign capital flight. "I think 100 is possible," she said, cautioning that the central bank lacks a clear tightening path, and even if the Strait of Hormuz reopens, energy shortages may not ease quickly, posing increasing risks to India's economic growth, which she described as "India's best card."