India’s rupee has suffered its sharpest one-day plunge in four years, crashing through the 93 mark against the dollar to an all-time low. Analysts warn the worst may still lie ahead if the Middle East conflict drags on.
With India importing nearly 90 per cent of its crude oil and around half its natural gas, the currency is highly exposed to the global energy shock now unfolding. Strategists say the rupee could weaken beyond 95 and even approach 96 as pressure builds.
“We see the Indian rupee as vulnerable,” says Michael Wan, currency analyst at MUFG Bank, predicting it could slide to “below the 95 levels if the Iran and Middle East conflict is sustained.”
The scale of that shock has been underscored by the head of the International Energy Agency. In an interview with the Financial Times on Friday, Fatih Birol warned the war has triggered “the greatest global energy security threat in history”.
The Reserve Bank of India has already spent more than $20 billion in recent weeks trying to defend the currency, but the rupee continues to weaken under relentless demand for dollars from oil companies scrambling to secure supplies. On Friday, the rupee dropped more than one per cent to close at 93.76 per dollar, briefly weakening past 94 in financial hubs outside of India.
India’s vulnerability is rooted in its dependence on imported energy, much of it sourced from the Gulf. That exposure has become more acute as Iran has effectively choked off the Strait of Hormuz, which carries a fifth of global oil and gas flows.
The disruption has driven up prices and tightened supplies, pushing India’s import bill higher and putting heavy pressure on the currency.
“The rupee could be more vulnerable if the conflict drags on, which mainly reflects its exposure to higher energy prices,” says Vivek Rajpal, Asia macro strategist at JB Drax Honore.
The economic impact on India is spreading quickly. Higher fuel costs are feeding into inflation by raising transport and food prices, while also weighing on growth. The central bank estimates that a 10 per cent rise in crude prices can shave about 15 basis points off growth and add around 30 basis points to inflation.
The price for benchmark Brent oil surged to $119 a barrel on Friday before easing back toward $108.65. still far above the $70 level the Reserve Bank of India had forecast before the conflict.
India also faces other risks. Remittances from millions of workers in the Gulf, worth more than $50 billion a year, could come under pressure if the conflict disrupts regional economies.
At the same time, foreign investors are pulling money out. More than $9 billion has flowed out of Indian equities this year, with over $8 billion leaving in March alone. Bond markets are also under strain.
These pressures are hitting a currency that was already weakening. The rupee has fallen about 8 per cent against the dollar over the past year, dragged down by global uncertainty and persistent capital outflows. While a weaker currency can offer some support to exports, that remains a limited upside.
The situation has been worsened by damage to energy infrastructure. Israeli strikes have targeted facilities linked to the South Pars gas field, the world’s largest gas reserve shared by Iran and Qatar. Tehran has replied by attacking oil and gas installations across the Gulf.
Qatar has warned that the fallout from Iranian attacks on its Ras Laffan natural gas complex will be severe. Its energy minister, Saad Sherida Al-Kaabi, said the attacks could cut LNG export capacity by about 17 per cent, with repairs taking three-to-five years. For India, which was the second largest importer of Qatari LNG after China, the implications are significant.
Birol told the FT that the disruption from this conflict already exceeds previous crises. The amount of gas cut off is about twice what Europe lost after Russia’s invasion of Ukraine, while oil losses surpass even the shocks of the 1970s that triggered global recessions.
“People understand that this is a major challenge, but I am not sure that the depth and the consequences of the situation are well understood,” he said.
Even if the conflict eases, recovery will take time. “It will be six months for some (sites) to be operational, others much longer,” Birol told the FT, warning that prices are likely to remain elevated while shipping through the Strait of Hormuz is disrupted.
The impact is spreading worldwide, beyond oil and gas. The halt in shipments is affecting fertilisers, petrochemicals, sulphur and helium. “These are vital commodities for the global economy,” he said.
The IEA has released 400 million barrels from emergency stockpiles to ease shortages, but Birol stressed this is only a fraction of available reserves. “We still have 80 per cent in our pocket,” he said.
Even so, he made clear that alternative supplies cannot replace Middle Eastern energy. “The single most important action is the resumption of transits through the Strait of Hormuz,” he said.
Looking ahead, Birol told the Financial Times that the crisis is likely to reshape global energy policy, much like the oil shocks of the 1970s, which drove a surge in nuclear power, improvements in fuel efficiency and shifts in trade.
This time, he expects faster adoption of renewables, renewed momentum for nuclear energy and a push toward electric vehicles, although some countries may turn back to coal in the short term to replace lost gas.