The Indian rupee faced another setback on Friday, sliding by 30 paise against the US dollar amid escalating geopolitical tensions between India and Pakistan. This turmoil has prompted a risk-averse attitude among investors, intensifying the demand for the greenback. The local currency opened at 85.88 against the dollar, following a steep decline of 81 paise in the previous session, marking its most significant drop in over two years.
Geopolitical Tensions Impact Currency Stability
The ongoing conflict between India and Pakistan is a central factor influencing the rupee’s depreciation. Recently, Pakistan’s military conducted drone strikes along the western border on the night of May 8-9, which the Indian Army reportedly repelled effectively.
- Increased military activity typically drives investors to seek safer assets, resulting in capital outflows that weaken the local currency.
- Amit Pabari, Managing Director of CR Forex Advisors, notes that while this weakness might persist in the short term, strong economic fundamentals could lead to a recovery for the rupee as tensions ease.
Strength of the US Dollar
The dollar index—an indicator of the dollar’s performance against a basket of six currencies—rose 0.01% to 100.65. This increase is attributed to improving global trade dynamics and reduced expectations for imminent interest rate cuts by the Federal Reserve.
- The USD/INR exchange rate surpassed 85.80 this week, fueled by both the dollar’s rebound and rising crude oil prices amid renewed optimism in US-China trade discussions.
- Jigar Trivedi, Senior Research Analyst at Reliance Securities, highlights that geopolitical strains are compounding the pressures on the rupee.
Rising Crude Oil Prices
Simultaneously, crude oil prices have seen a surge, which further compounds the rupee’s challenges. Brent crude, the global benchmark, increased by 0.41% to $63.10 per barrel in futures trading.
- The Indian stock market also reacted adversely, with the BSE Sensex dropping 809.19 points (1.01%) to 79,525.62, while the Nifty 50 fell 276.35 points (1.14%) to 23,997.45.
Future Outlook for the Rupee
As we look ahead to next week, the currency markets are set to focus on critical economic indicators, including Consumer Price Index (CPI) data from both India and the United States and US retail sales figures. Developments in US-China trade negotiations and the ongoing India-Pakistan tensions will also be under close scrutiny.
- Analysts predict that the rupee may continue its downward trend in the short term, with projections suggesting it could approach 86.50 against the dollar.
- Jigar Trivedi indicates a bullish outlook for the USD/INR pair in the near term, while Amit Pabari suggests significant resistance for the rupee around 85.80-86.20 with an 80% chance of these levels holding firm.
In summary, the Indian rupee’s outlook remains precarious as geopolitical factors and global market dynamics exert pressure. Investors are advised to stay informed on upcoming economic data and geopolitical developments that could influence currency stability in the coming weeks.
