Hum itna kab gir gaye laxman?
The Indian rupee has fallen beyond the ₹92 (Indian Rupee) level against ($1) the US dollar, due to global market anxiety resulting from geopolitical tensions in the Middle East. Tensions in the Middle East, with the US, Israel and Iran being involved in the conflict have affected global equity markets.
Investor concerns about geopolitics are escalating and oil prices are increasing, prompting a flight to safety by moving funds into the US dollar and a large sell-off across emerging markets. For India, the crisis presents a fragile point of pressure because of its dependence on imported oil, and now has exposed how vulnerable its economy is.
Handle with care yaar, economy is a fragile!
Rupee hits historic low, setback is riyal
The rupee fell to about ₹92.17 (Indian Rupee) per US dollar on February 8, from previously breaking through the record low of ₹91.9875 on January 3, according to Reuter’s. This represented a drop of nearly 0.7% in just one transaction and demonstrated how serious investors from around the world are concerned with. Geopolitical conflict, significantly rising oil prices, the moving investments worldwide into US dollars are all believed to have contributed to the decline of the rupee in its value.
As per NewsX, the rupee INR=IN fell against the dollar to 92.17, a decrease of 0.7% from the previous all-time low of 91.9875 set in January. Global financial markets fell due to concerns of potential energy-related inflation resulting from the current war and resulting delays in interest rate reductions.
The turmoil was not limited to currency markets as stock markets across Asia suffered from falling prices as investors sought to reduce their investment risk due to increasing tensions that could lead to a wider regional conflict.
SIR WHAT?
Whyyyyyy?
The immediate cause of the rupee’s decline has been an increase in geopolitical risk due to heightened tensions between the U.S., Israel, and Iran.
As a result, the U.S. dollar rose globally, while more emerging-market currencies, including the Indian rupee, have faced severe downward pressure.
The continued escalation of military operations throughout the region by Israel further deteriorated the currency situation of emerging markets. According to NewsX, the military conflict between Israel and Iran expanded further since the initial strike against Iran by Israel and has continued to expand into a campaign of air attacks against Iran by both the U.S. and Israel.
The uncertainty due to instability in markets prompts investors to move funds into more secure assets, which have included the dollar. This phenomenon is known as a “flight to safety” by economists.
Due to this situation, the dollar has grown stronger relative to all currencies worldwide; as a result, currencies from developing nations have depreciated, including the Indian rupee. The situation worsened when the Israeli government broadened the scope of its military action in the middle east by conducting military operations throughout the entire middle eastern region (March 2009), and subsequently, the expansion of those operations has impacted the operations of the oil and shipping sectors in the gulf region.
SIGH!
One of the most profound impacts of these hostilities on the economy has been the attack on the price of oil which has increased drastically.
Since the war broke out, Brent crude oil has surged over 13% and raised concerns about a potential global energy crisis due to worries about disruptions in one of the world’s most important energy supply routes, the Strait of Hormuz.
According to NewsX, “Iran has attacked energy infrastructure and tankers that are traversing the Strait of Hormuz.”
It has been reported that Iran attacked energy infrastructure in Gulf nations and attacked tankers moving through the Strait of Hormuz that is one of the most important tanker routes, accounting for approximately 20% of the world’s oil and LNG.
Any disruption to this very narrow route for maritime shipping could seriously restrict the supply of oil to global markets leading to further price increases.
India’s Vulnerability to Oil Price Shocks
India is at a higher risk of these disruptions, as such a large percentage (~85%) of its crude oil requirements are imported.
Mere ko toh aisa dhak dhak horela hai baba.
India is very dependent on importing crude oil from other countries and as such, its economy is greatly impacted by swings in worldwide oil prices.
According to NewsX, “The escalation of the Middle East conflict will impact India through multiple channels. India imports around 80% of its crude oil requirements, making the rupee very sensitive to oil price shockwaves that will increase the import bill, increase the current account deficit, and accelerate inflation.”
As India continues to see a dramatic rise in oil prices, the country will need to spend a considerably larger number of dollars each year on buying energy, leading to an increase in the demand for U.S. currency and a corresponding decrease in the value of the Indian rupee.
Setback is real guys.
Markets Showing Increased Volatility With Concerns Over Inflation
The increase of oil prices has also raised several concerns about inflation returning globally.
As rising energy prices cause central banks to delay rate cuts, it will only serve to further shake the confidence of investors.
According to market participants, the uncertainty remains at present and their financial markets are now in a defensive position.
According to analysts from Standard Chartered, “For the financial markets… focus will continue to be on the potential occurrence of a regional conflagration and the potential disruption to oil supplies in the Strait of Hormuz and the resulting impact on oil prices.”
The Indian markets have lost some of their foreign investment.
The rupee’s value has also decreased due to these capital outflows.
When investors fear global instability, they typically stop investing in emerging markets such as India and instead invest in developed markets.
Lately, this has started to happen, and many foreign investors are reducing their investments in Indian equities.
This further pushes the rupee down in value.
Reddit reactions will make you go 😳😳😳
The current crisis has caused an uptick in discussion related to this issue online (mostly Reddit), where many use sarcasm (Genz ki first language *shy*) and/or frustration with the current situation, in addition to expressing economic theory regarding the state of the Rupee.
A user had this to say:
“Don’t forget about 2008 and all these Middle East wars affecting our oil coming from Gulf Of Hormuz. We have used one way or another time and again to limit these sanctions to limit our effects. We had also had sanctions but still managed to carry out the ‘White Revolution’ And ‘Green Revolution’ while producing enough food for everyone.”
Another user replied:
“Classic deflection… countries blaming everything on The West and not realizing a great deal of our economic problems stem from within.”
There were even some comments which made dark jokes about the falling value of the currency:
Someone else chimed in, “Just make it 100 already, like conversions are so easy.”