Citigroup's Indian clients are increasingly concerned about rupee volatility, according to a Bloomberg report. This shift in focus comes as geopolitical tensions in the Middle East have intensified, significantly impacting global crude oil prices and subsequently the Indian rupee. The rupee has seen considerable depreciation, notably breaching the $96 mark against the US dollar and reaching an eight-week low, despite efforts by the Reserve Bank of India (RBI) to attract foreign capital and intervene in the forex market. This rise in crude oil prices, attributed to the US reimposing a naval blockade on Iranian ports and President Donald Trump's intensified military operations against Iran, directly increases India's import bill and demand for dollars, putting downward pressure on the rupee.
Several factors have contributed to the rupee's recent weakness. High crude oil prices, safe-haven demand for the dollar, and a resumption of local asset sales by overseas investors have all pressured the currency. The RBI has intervened multiple times to contain further losses, for example, around the $96.20 level, but the continuous safe-haven dollar demand, particularly from oil companies and importers, has limited the effectiveness of these interventions. Moreover, the expected impact of capital inflows from measures like the RBI's special forex swap window for FCNR(B) and ECB, estimated to be between $30 billion and $70 billion, has been outweighed by negative market sentiment.
The rupee's depreciation has been significant in recent weeks. After strengthening to around $94.39 on June 25 following RBI measures, it has steadily weakened, closing at $96.20 against the dollar on Tuesday, reaching its weakest closing level since May 21. This marks a 1.4% depreciation for the current fiscal year. Previously, on May 20, the rupee hit a record low of $96.96 intraday and closed at $96.82, which remains the weakest closing level on record. Citigroup analysts had previously projected that India could attract $60 billion to $80 billion in foreign capital by year-end due to RBI measures, but current market sentiment and geopolitical developments are challenging these expectations.
In response to the rupee's slump and to bolster foreign reserves, Citigroup suggests that India may consider tightening currency controls in the coming months. These measures could include restricting outflows from domestic businesses and encouraging foreign inflows. The government has already taken steps such as hiking fuel costs and increasing taxes on gold imports. These potential new restrictions on outward direct investment by businesses are part of a broader strategy to stabilize the rupee and manage the current account deficit, which is under pressure from soaring global oil prices.
