Rupee slide likely to continue as US sanctions threat looms over Iran

If rupee's weakness was a concern, the recent move by the United States to exit the Iran nuclear deal and a looming threat of US sanctions on Iran is likely to keep oil and gasoline prices higher.

3 min readNew DelhiMay 11, 2018 02:18 AM IST First published on: May 11, 2018 at 02:18 AM IST

Rupee slide likely to continue as US sanctions threat looms over Iran

Over the last month, the domestic currency has lost 3.6 per cent as it slid from around 65 to 67.34 vs dollar on Thursday.

The weakening of rupee against the dollar over the last month has caught importers by surprise and is impacting their business and earnings. The situation is not expected to improve in the near future with a strengthening dollar, high crude oil prices and concerns surrounding the current account deficit and fiscal deficit.

If rupee’s weakness was a concern, the recent move by the United States to exit the Iran nuclear deal and a looming threat of US sanctions on Iran is likely to keep oil and gasoline prices higher. Experts say that while Iran had ramped up its oil production by 1 million barrels per day following the lifting of sanctions in 2016, the prospect of fresh sanctions may take some of that supply out of the market thereby boosting prices further.

That being the case, as oil forms the biggest component of India’s import bill, rupee may weaken further.

Over the last month, rupee has lost 3.6 per cent as it slid from a level of around 65 to 67.34 against the US dollar on Thursday. However, since January 1, rupee has lost 5.8 per cent and has been among the three worst performing major currencies. Only the Russian Ruble and the Brazilian Real have performed worse than the rupee since January 1. Chinese Yuan, South African Rand, Mexican Peso, Philippine Peso and Indonesian Rupiah have done much better when it comes to stability against the dollar. Over the last few months, emerging market economies have witnessed weakness in their currencies on account of outflow of funds in line with rising treasury yield in the US.

“While the strengthening dollar has been a reason for the weakness of rupee, it has also been impacted by a rise in brent crude prices that currently is hovering around $76 per barrel and concern over current account and fiscal deficit,” said Nitesh Sharma, CEO, Route Forex. He added: “With brent crude expected to rule high given the geo-political concerns around Iran and dollar expected to remain strong, the rupee is likely to breach 68 against the dollar in the near term.”

Kishore Narne, head of currency and commodity business at Motilal Oswal said that most of the negatives have already been factored in by the market and so the rupee may not lose much from current levels. “I don’t see rupee weakening beyond 68.25 against the dollar as most of the negatives have been factored in. There may be some more uptick in crude oil prices that may put some pressure on rupee,” said Narne.

While exporters may benefit from a weakening currency, importers will witness pressure on their business. Traders say that while importers had hedged their positions at 64-65 against the dollar, they have been taken by surprise by the sharp adverse movement over the last one month and are taking a hit.

Market experts feel that a sharp movement in rupee is also expected to keep the stock markets volatile and in an election year it may also have a political impact.

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