Rising oil prices hit the currency of energy-importing countries hard! The Indian rupee is feared to fall below the 100 mark.

For India, which relies on imports for about 85% of its crude oil, the soaring oil prices have not only sparked serious concerns about input-driven inflation, but have also directly shaken confidence in the currency market. Market strategists warn that if the Iran war drags on, the Indian rupee could fall to a record low of 1 US dollar to 100 rupees or even lower. The efforts made by the Indian authorities over the past year to curb the rupee's approximately 10% decline may only provide temporary relief. Analysts from Credit Suisse and VanEck Consulting stated that the high oil prices will exacerbate inflation and current account deficits, accelerating the depreciation of the rupee. The options market also agrees with this view, pricing suggesting that the rupee will continue to fall further and indicating that the market expects the rupee to reach the 100 mark. Since the beginning of this year, the rupee to dollar exchange rate has been one of the worst performing currencies in Asia, with its continuous decline prompting the Reserve Bank of India to take one of the most aggressive measures in over a decade, setting the daily closing position limit for banks in the domestic foreign exchange market at 100 million US dollars. This change has forced banks to reduce their positions and limit their ability to make large-scale one-way bets. However, Monday's price movements highlighted the limitations of such measures: the rupee initially surged by 1.4% at the open due to the restrictions, but quickly reversed course, hitting a new low of 95.125 later in the day. The market was closed on Tuesday. "1 US dollar to 100 rupees is no longer a tail risk - if the current situation continues, this will be a credible pressure scenario," said Ahmed Azam, head of financial market research at Amman brokerage firm Equiti Group. "The latest measures seem more like short-term stability tools than structural solutions." Hope and uncertainty after the war With US President Donald Trump indicating that the United States is expected to wrap up within two to three weeks, hopes for the war to be near its end are increasing. However, it is still unclear whether this timeline is reliable. In addition, the recent increase in US troops to the region leaves room for escalation, should Trump change his mind, the situation could still worsen. Prior to the war, the rupee was already under pressure due to widening external balances and capital outflows. The oil crisis has heightened the pressure on this world's third-largest oil importer, and the potential decrease in remittances from Indian expatriates in the Gulf region could further weaken capital inflows and market sentiment. In this context, short positions remain strong. Nick Twidale of AT Global Markets stated that even after the latest restrictions, he still sees ongoing short bets on the rupee through the company's platform, indicating that some investors are unmoved by the efforts of the Reserve Bank of India. "This war continues, it is almost certain that the rupee will break through 100 and continue to fall lower. The Reserve Bank of India will try to prevent the weakness of the rupee, but the macroeconomic situation will dominate. The rupee will rebound one day, but it is not decided by the Reserve Bank of India, but by the market," said the senior currency trader. Option pricing shows that traders believe there is a 13% probability that the US dollar to rupee exchange rate will reach 100 by the end of June and a 41% probability by the end of the year. Mark Cranfield of Bloomberg Strategy stated, "The forward curve for the US dollar against the rupee is at its steepest level since 2020, indicating that forex traders believe the Indian rupee will remain weak for a longer period. Although President Trump hinted that the US is about to withdraw from Iran, emerging market currency traders believe that high oil prices will cause lasting damage to the rupee." Arup Chatterjee, Global Macro Strategist at Credit Suisse, citing the example of the 2022 Russia-Ukraine conflict when the rupee devalued by about 10% in six months, pointed out that the severity of this oil supply disruption could be worse, and since the outbreak of the Iran war, the rupee has fallen by less than 5%. He warned, "If the US-Iran war continues until the end of April, it is highly likely that the US dollar to rupee exchange rate will break through the 100 mark." Impact of oil prices and economic challenges Since the conflict broke out at the end of February, Brent crude oil prices have soared by about 44%, reaching a high of $119.50 per barrel. Some analysts warn that if the state of near-blockade in the Strait of Hormuz continues in the next six to eight weeks, oil prices could further rise and even reach $150 or $200 per barrel. Chatterjee added that the Reserve Bank of India's restrictions may deplete liquidity in the domestic currency market, increase hedging costs for importers and foreign securities investors, and drive more speculative activities offshore, beyond the control of the central bank. Given that the rupee was already weak before the outbreak of the war - mainly due to concerns about US-India trade relations, the impact of artificial intelligence on key service exports, and sluggish foreign investment - some investors doubt that even if the Middle East conflict ends, it will be able to completely stem its depreciation. "Even if the crisis ends, I expect the rupee to resume its weak performance," said Wim Sin, Chief Economist at Nasau Bank 1982 Limited, with nearly forty years of market experience, "which means that the rupee will not get much relief." As uncertainty about the duration of the war continues to build, global funds withdrew about $12 billion from the Indian stock market in March, the largest single-month net outflow on record. Anna Wu, cross-asset strategist at VanEck, said that India is still in a "difficult situation," pointing out that India is vulnerable to the impact of oil shocks and historical outflows of foreign capital. "I think it is possible to reach 100," she said, warning that the central bank lacks a clear tightening path and, even if the Strait of Hormuz is navigable and energy shortages are difficult to quickly alleviate, the risks facing the Indian economy are becoming greater, with economic growth being what she called "India's best hand."