According to Anindya Banerjee from Kotak Securities, the trajectory of the rupee is now closely tied to the direction of crude oil prices and sustained foreign outflows. “As long as oil continues to hold above the 100 mark, the pressure will be on the rupee,” he said, pointing to Brent crude hovering well above $100 despite some cooling from recent highs near $120.
The currency’s weakness is being compounded by sharp foreign portfolio investor (FPI) outflows. Nearly $10 billion has exited Indian markets within just three weeks of the month, marking the steepest monthly outflow since October 2024. This has intensified pressure on the rupee at a time when global uncertainty is already elevated.
While March typically brings some respite due to exporter dollar sales ahead of the financial year-end, Banerjee cautions that the broader trend remains unfavorable. “The trend is still upward on USD-INR. It can hit the levels of 94 or even 94.25,” he noted.
Hormuz: The New Anchor for Currency Moves
What makes the current episode distinct is the overwhelming influence of geopolitical risk, particularly in West Asia. The Strait of Hormuz, a vital global energy corridor, has emerged as a central factor in asset pricing worldwide.
“It is hard to find an asset class in the world which has not been priced off Hormuz,” Banerjee observed. With nearly 20% of global oil and gas flows passing through this narrow chokepoint, any disruption has far-reaching consequences. For India, which sources a significant portion of its energy needs from the region, the impact is even more pronounced.
“Ultimately, the Hormuz flows have to improve for the Indian rupee to see an appreciation and the FPI outflows to reverse towards inflows,” he said. Alongside institutional outflows, speculative selling in the currency market has also picked up—a typical response to surging oil prices.
RBI Steps In, But Challenges Persist
The Reserve Bank of India (RBI) has not remained a passive observer. It has actively intervened through a mix of spot market operations, forward contracts, and non-deliverable forwards (NDFs) to smooth volatility.
“RBI has the muscle and the firepower,” Banerjee emphasized. However, he pointed out that the central bank is likely to rely more on forward and NDF interventions to avoid tightening domestic liquidity excessively. “They will keep shuffling between spot and forward… we will see very heavy intervention from the RBI,” he added.
Yet, questions remain over the sustainability of such interventions. With persistent FPI outflows and a widening current account deficit, the RBI may be buying time rather than reversing the underlying trend.
Panic Versus Structural Shift
A key debate in currency markets is whether the rupee’s recent fall reflects panic-driven volatility or a deeper structural shift. Banerjee believes it is a mix of both, with recent moves leaning heavily toward panic.
“From the first week of March it is more panic because when oil started to rise above $80, that panic has set in,” he explained. Market participants are already bracing for higher levels, with round numbers like 95 entering the conversation.
Exporters, who typically provide dollar supply, are also timing their conversions carefully. “They tend to hold out till the last day if they can get a better price,” Banerjee noted, adding to near-term volatility.
Inflation Risks and Policy Dilemmas
Looking ahead, the duration of elevated oil prices will be critical in shaping monetary policy. While headline inflation is expected to rise immediately, the more concerning risk lies in a sustained increase in core inflation.
“If the oil situation continues for three-four months, then you will see that feed into your core inflation,” Banerjee said, drawing parallels with 2022—but highlighting that the current scenario involves supply constraints as well.
The timeline of disruption in the Strait of Hormuz will be crucial. “If the lockdown of the Hormuz continues beyond mid-April, the impact can be quite severe… not just on India, but on any major economy in the world,” he warned.
A Fragile Balance
For now, the rupee stands at the intersection of geopolitics, commodity prices, and capital flows. While RBI intervention may slow the pace of depreciation, a meaningful recovery appears contingent on easing energy prices and normalization of global risk conditions.
Until then, the currency may remain in a volatile—and potentially weaker—trading range, with global developments dictating its next move more than domestic fundamentals.