Indian Rupee Hits Record Low, Falls Past 84 Against US Dollar Amid Rising Crude Oil Prices & FPI Outflow

The Indian Rupee hit a historic low against the US dollar on October 11, driven by surging oil prices and significant foreign outflows from Indian equity markets. The Rupee sank to a lifetime low of 84.0525 per US Dollar, surpassing the critical 84 level-a threshold that the Reserve Bank of India (RBI) had been actively defending for weeks. By the close of the trading session, the rupee remained at 84.05.

The sharp decline of the Rupee comes at a time when oil prices are on the rise due to growing geopolitical tensions in the Middle East. Brent crude oil prices surged more than 3.5% on Thursday, with the global benchmark last quoted at $79.1 per barrel. October has seen oil prices spike by over 10% amid concerns of an escalating conflict in the Middle East, which could further disrupt global supply chains.

For India, a country heavily reliant on oil imports, the rising crude prices are especially troubling. The nation imported crude worth $139 billion in the 2023-24 financial year, according to government data. The surge in oil prices adds inflationary pressure, further weakening the Rupee as the demand for US Dollars intensifies to pay for these imports.

The Reserve Bank of India has been attempting to stem the fall of the Rupee by intervening in the currency markets. Just over two weeks ago, the rupee had shown signs of recovery, trading near 83.50 to the US Dollar. However, the renewed pressure from rising oil prices and continued foreign outflows has pushed the rupee to break the 84-mark-a level that the RBI had been defending rigorously through interventions.

According to recent reports, the RBI has informally instructed banks to avoid making large bets against the Rupee, in a bid to manage the volatility. Despite these efforts, the Rupee's depreciation has continued, largely due to global factors outside the central bank's control, such as fluctuating oil prices and policy actions by the US Federal Reserve.

Another key factor contributing to the Rupee's decline has been the exodus of foreign funds from India's equity markets. Foreign institutional investors (FIIs) have been pulling money out of Indian stocks, further exacerbating the pressure on the rupee. As global investors shift towards safe-haven assets amid uncertain global economic conditions, the demand for the US Dollar has risen, putting emerging market currencies like the Rupee under strain.

Adding to the pressure on the Rupee is the US Federal Reserve's stance on interest rates. Earlier this year, investors had anticipated a rate cut from the Fed, with debates surrounding whether it would be a 25-basis-point or 50-basis-point reduction. However, recent developments indicate that the Fed may not cut interest rates at all in November, leading to increased demand for the US Dollar and further weakening of the Rupee.

The possibility of the Fed skipping a rate cut altogether has shifted market sentiment, making the Dollar more attractive to global investors. This has resulted in outflows from emerging markets, including India, which has further contributed to the Rupee's depreciation.

India's foreign exchange reserves have remained robust, hitting a record high of $704.9 billion as of September 27, according to RBI data. However, even with strong reserves, the pressure on the Rupee is expected to persist if oil prices continue to rise and foreign outflows from Indian markets remain steady.