On the back of a sharp rise in global crude oil prices amid geopolitical tensions, the rupee tumbled to 76.96 against the US dollar, hitting a lifetime low in early trade on March 7. On March 4, the rupee had closed at 76.16.

The Indian currency plummeted as crude oil prices flared up, threatening to inflate the country’s import bill and widen trade and current account deficits. On March 7 0128 GMT, Brent crude futures rose 7.2 percent, or $8.46, to $126.57 a barrel, Reuters reported. Oil prices surged to the highest levels since 2008 on tight supply fears as the US and European countries contemplate imposing a ban on Russian oil imports for its invasion of Ukraine.

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Deficits grow

India, one of the world’s largest importers of crude oil, has already seen its current account deficit harden considerably. Current account deficit is the difference between the total value of imports and the total value of exports.

“We expect the current account deficit to widen to 2.6 percent of GDP in FY23 from 1.7 percent in FY22, assuming oil prices average $86.6/bbl,” Nomura said. If oil prices remain at such high levels, the “risks are skewed towards a much wider deficit,” the March 3 report said.

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Trade deficit widened from $17.9 billion in January to $21.2 billion in February, primarily driven by the oil price rise.

Impact on rupee

Since the beginning of the current calendar year, the turmoil in global markets has caused the rupee to depreciate 3.5 percent. The rupee has lost 2.17 percent to the dollar since February 21. However, experts believe that India’s strong foundation could weather the storm.

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How is RBI controlling rupee?

To check the fluctuations, the Reserve Bank of India (RBI) is said to have sold $2 billion in the local currency market recently.

Both public sector banks and private lenders are said to have offloaded dollars on RBI’s behalf in the spot market and through GIFT City branches, The Economic Times reported. The move will help curb the liquidity in the system.

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Similarly, the central bank is set to hold a two-year dollar-rupee sell/buy swap auction of $5 billion on March 8 to manage surplus liquidity and enhance the supply of dollars in the exchange market.

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In a buy/sell swap, the Indian currency is injected into the banking system, while taking out dollars. The reverse happens in a sell/buy swap. The forex swap will help the RBI keep the currency rates in check although in a limited way. As forex swaps are meant for liquidity management, their impact on currency is only incidental. However, given the current situation, the move will keep a check on the rupee’s volatility and curtail depreciation to some extent.

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RBI may wait

On the other hand, to boost export competitiveness, the RBI may allow further decline in the rupee, which has become the worst-performing currency in Asia since the start of the Ukraine war, The Economic Times reported.

"In such uncertain times, it is prudent to lie low," ET quoted Ashhish Vaidya, Managing Director at DBS Bank India, as saying.

Also read: Could the Ukraine invasion spark a global financial crisis?

(Edited by : Shoma Bhattacharjee)

First Published:Mar 7, 2022 6:28 PM IST