The Indian rupee fell to a record low on Wednesday as a deadlock in U.S.-Iran peace talks kept oil prices elevated, fuelling worries of a global inflation surge that have ramped up bets on rate hikes, lifting bond yields and weighing on equities.
The rupee fell to 96.96 per dollar, breaching its all-time low of 96.6150 hit in the previous session. The currency is down 6% since the Iran war began in late February.
Higher energy prices and weak capital flows, further strained by rising bond yields, have left India facing the prospect of a steep balance of payments (BoP) deficit for the current fiscal year.
While a weaker rupee can serve as an automatic adjustment mechanism by raising the cost of imports and making exports cheaper, persistent depreciation can turn into a self-fulfilling loop and erode returns for foreign investors.
Overseas investors have pulled out over $22 billion from local stocks and bonds since the war started, while Brent crude prices have surged over 50%.
"We favor a view that unfettered FX depreciation perpetuates further depreciation, rather than achieving current account equilibrium through significant devaluation," economists at Citi said in a note.
They added that energy shocks could push the dollar-rupee pair to 98 in the short term, but expect a retracement towards 95 in the second half of fiscal 2027 if the conflict resolves or policymakers intervene decisively to address BoP challenges.
Surging yields compound pain
Persistently high energy prices have stoked worries of a spike in a global inflation, prompting investors to raise bets on tighter monetary policy from central banks.
Interest rate futures show that the odds of a Federal Reserve rate hike have firmed, while swap markets in India are pricing in about 100 basis points of hikes over the next 12 months.
India's 10-year bond yield was last at 7.12%, up over 45 bps since the war began, while the benchmark Nifty 50 is down nearly 7% over the same period.
