The Indian rupee hit a new low, while stocks and bonds also fell as oil prices continued to rise, casting a pall over the country’s economy.
India buys roughly three-quarters of its oil from other countries, making it one of Asia’s most vulnerable countries to rising oil costs. Oil prices, which have already risen by more than 60% this year, could exacerbate price pressures, harm the nation’s finances, and throw a nascent economic recovery into disarray.
“Due to India’s huge reliance on imported fuel, oil has been the number one risk for decades,” said Srinivas Rao Ravuri, chief investment officer of PGIM India Asset Management Pvt. “Evolving geopolitical tensions, crude, and the impending Fed raise have weighed on investor sentiment toward developing markets, particularly India, which was trading at a premium to its peers until recently.”
On Monday, the rupee fell as high as 1.1 percent to 76.9812 per dollar. The S&P BSE SENSEX Index plummeted to its lowest level since July, as benchmark government bond yields climbed eight basis points to 6.89 percent.
The rupee has now become Asia’s poorest performer this year as a result of today’s action. The benchmark yield is set to rise for the first time in over a month.
In a note, Barclays Plc analysts including Ashish Agrawal wrote, “Geopolitical risks will likely remain elevated, notably on the terms of trade shock and current-account deficit consequences.” “The INR is more vulnerable to supply-side oil shocks,” he said, adding that the Reserve Bank of India “is likely to continue passively selling USD, but is unlikely to defend any particular level.”
Since September, foreign funds have withdrawn nearly $16 billion out of India’s equity markets. Given the precarious geopolitical situation, the initial share sale of Life Insurance Corp., dubbed “India’s Aramco moment,” is increasingly likely to be postponed.
Traders expected $5 billion to $6 billion in inflows from the share sale, which would have given the currency some support.
According to dealers, the average yield on top-rated 10-year business notes increased by as much as 7 basis points on Monday. According to Bloomberg data, this is the highest level since February 10.
“People may want to bury their heads in the sand and hope everything goes away,” said Abhay Agarwal, fund manager at Mumbai-based Piper Serica Advisors Pvt. “However, in times like this, even no returns will be a terrific outcome,” he said.