INR at Record Low: Rupee jitters far from over? 3 factors keeping forex market nervous

The rupee depreciated to a record low of 95.73 against the US dollar on Tuesday as traders fretted over US President Donald Trump's "ceasefire on life support" remark that diminished nascent hopes of a permanent resolution in the West Asia conflict -- now in its 11th week. Analysts say that growing expectations that crude oil rates may remain elevated for longer than anticipated earlier along with an overall weakening market sentiment put pressure on the forex market.

The rupee began the day at 95.50 against the American currency -- already breaching its existing all-time low of 95.43 recorded last week. In intraday trade, the domestic currency tanked to the latest record low, taking its overall losses since the onset of the US-Israel vs Iran war to over five per cent.

For the year, the rupee has depreciated about 6.5 per cent against the greenback so far, becoming the worst performing Asian currency.

Donald Trump says ceasefire on massive life support

On Monday, US President Donald Trump said that the Iran ceasefire was on "massive life support", describing its status as "unbelievably weak", according to foreign media reports. After his comments, Iran's parliamentary speaker, Mohammad Ghalibaf, said on social media that Tehran's armed forces were "ready to respond and to teach a lesson for any aggression".

Earlier, both sides rejected each other's latest peace proposal, once again leaving the negotiated ceasefire vulnerable.

What's battering rupee in forex market?

Analysts say that Trump's sharp rejection of Tehran’s response to Washington’s peace proposal has dampened the mood amid growing hopes of easing tensions.

Crude oil rates jumped after the news. On Tuesday, Brent was last seen trading above the $105 a barrel mark, reversing recent losses that took it to double-digit dollars per barrel late last week. Headline oil rates have touched nearly four-year highs since the onset of the Middle East conflict.

Sudden spikes in oil rates tend to put pressure on the rupee with the widening of India's import bill -- a larger import bill requires the country to sell more rupees to buy more dollars.

India meets more than four-fifths of its crude oil requirement through imports. This is why any surge in oil prices pushes up the import bill, widens the trade and current account deficits, and forces the rupee to lose its value against the dollar.

Some analysts argue that the longer the war drags on, the higher will be the risk of elevated oil prices for a prolonged period and a propotionate risk to the rupee.

India is set for a third consecutive balance of payments deficit this fiscal year, with economists cutting growth forecasts, lifting inflation estimates and lowering rupee projections.

Over the weekend, Prime Minister ⁠Narendra Modi urged citizens to use auto and cooking fuels more frugally and postpone any foreign travel to save foreign exchange.

His seven-point appeal to citizens to conserve forex added another layer of concern, with markets interpreting it as a subtle acknowledgment that the country’s trade deficit and balance-of-payments pressures could worsen if crude prices remain elevated for longer, noted Amit Pabari, MD, CR Forex Advisory.

"Going forward, markets will closely track signals emerging from President Donald Trump’s visit to China, especially for any indications related to global trade discussions and broader geopolitical negotiations. On the data front, markets this week will also closely track inflation data from both India and the United States," said Pabari earlier on Tuesday.

Key reasons behind rupee depreciation

According to analysts, three factors are primarily denting the domestic forex market:

• West Asia tensions and Strait of Hormuz disruptions: The markets are worried that the fragile ceasefire between the US and Iran may not last, adding pressure to the forex market.

• Elevated crude oil rates for long: A prolonged period of higher oil prices fuel tend to widen the twin deficits while adding inflationary pressure to the economy. However, the Indian government has repeatedly assured the public of adequate supplies to the public and essential services, with ramped up domestic energy production and diversified imports.

• Uncertainty around central‑bank policy: Traders continue to assess mixed signals from major central banks, especially the Fed which is due for a leadership change. At his last policy statement in April, the outgoing Chair Jerome Powell said the central bank “exists for one fundamental purpose: to foster the economic conditions in which American families and businesses can thrive -- stable prices, a strong job market and a financial system they can depend on". Trump has named Kevin Warsh as Powell’s successor.

USD vs INR: Technical levels to track

The 94.00-94.20 zone is expected to act as a strong support area for the USD-INR pair, with 95.50 being a crucial resistance level on the upside, wrote Pabari in a morning note.

"A sustained break above 95.50 could immediately trigger another sharp 50-paise move higher in the pair," he said.