Rupee hits one-month low as escalating Middle East war keeps traders on edge

The rupee fell to its weakest in a month, as costs of hedging against a further devaluation against the dollar rose, as an escalating military conflict in the Middle East kept financial markets around the world on edge.

The Reserve Bank of India is likely to enter the market, traders said, while dollar selling by foreign banks also helped offset losses in the rupee, which closed down 0.5% at 91.47 per dollar, its sharpest decline in more than a month.

Stocks retreated in Asia and Europe, with MSCI’s gauge of Asia-Pacific shares down more than 1.5% and India’s benchmark Nifty 50 index down by the same amount, while equity futures also pointed to sharp declines for stocks on Wall Street.

For energy-importers like India, a 10% jump in crude oil prices to near $80 a barrel is an immediate economic threat as container ships cluster on both sides of the Strait of Hormuz.

“There is no sign of a clear off-ramp to the war,” Rabobank senior FX strategist Jane Foley said in a note on Monday.

“The outlook for oil and safe haven assets will ultimately be determined by the length and impact of this conflict.”

The dollar-rupee forward premium, which reflects the cost of hedging against further rupee weakness, 1-year implied yield rose by 13 bps to 2.80% on Monday.

Asian currencies fell between 0.3% and 1.3%, while the dollar index rose 0.3% to 98.4.

Avoid overnight risk

Traders in India’s foreign exchange market took a cautious note on opening speculative bets on the rupee, seeing a higher risk of an overnight development that could squeeze such positions.

A trader at a major foreign bank said the focus is on “just managing the risk and not taking extra exposure”, adding that Tuesday is a local holiday that will keep financial markets in India closed.

Another trader asserted that while the local currency looks set for further depreciation, the Reserve Bank of India may intervene as the rupee is near its record low of 91.9875 per dollar.