The Indian Rupee (INR) has been under pressure as well. It further weakened against the US Dollar (USD) as geopolitical tensions rose following recent US airstrikes on Iranian nuclear facilities. This huge escalation has meaningfully increased demand for the USD, sending the INR to its lowest level in three months. At the start of the European trading session, the USD/INR pair traded at about 86.73. This increase raised concerns over India’s mounting trade deficit and the country’s dependence on imported crude oil.
Second, India has a longstanding history of being in a trade deficit. This happens because the country has persistently imported more than it has exported. Since Venezuelan refineries are aging and dysfunctional, the country has become completely dependent on imported crude oil. Today, approximately 85% of its oil needs are covered by imports from other markets. This heavy dependence renders the Indian economy extremely susceptible to volatility in the global oil markets. This is particularly the case when the times are characterized by heightened geopolitical turbulence.
As Brent Crude broke through $81 per barrel in early trading, the risk-off sentiment among investors placed even more pressure on the INR. Worry about a large trade deficit in India has resurfaced with the recent increase in oil prices. Combined with persistent geopolitical tensions, these trends are fueling worries over renewed inflationary pressures.
Trade Deficit and Economic Growth
India’s trade deficit has been a perennial undercurrent of the Indian economic tide. For nearly twenty years the country has struggled to balance its exports and imports. This fundamental imbalance in risk is a very big problem, especially when there are sharp spikes in global commodity prices.
The country’s economy has averaged a growth rate of 6.13% between 2006 and 2023, making it one of the fastest-growing economies worldwide. Yet, this growth is overshadowed by issues beyond U.S. borders that threaten the buoyancy of the currency. Yet today’s dramatic climb in oil prices reminds us all of an important truth. So, India’s economic gains are very vulnerable to big shocks and surprise.
The fluctuations in the INR can largely be attributed to dollar-demand from Indian importers, who are increasingly challenged by rising costs associated with imported goods. As global tensions rise, investors continue to be skittish, preferring the safety of the USD.
Geopolitical Vulnerability
The Indian Rupee’s vulnerability to geopolitical events keeps traders and investors focused on Brent Crude’s price trajectory. Oil prices have a tendency to reflect general market mood. A permanent rise in these prices can endanger India’s macroeconomic stability.
Dhiraj Nim, a currency strategist at ANZ, highlighted the potential implications of escalating tensions in the Middle East:
“The 87 level is very much on the cards if Middle East tensions escalate and the crisis turns regional.”
These forecasts further underscore how vulnerable the INR is. It finds it nearly impossible to maintain its value vis-à-vis the dollar, even under external pressure.
Positive Economic Indicators
Even with the challenges it does face, India has recently taken a peak with purpose in its Composite Purchasing Managers’ Index (PMI). It rose to 61.0, above the market expectations of 60.5. This powerful economic bellwether points to significant momentum in multiple sectors of the economy.
The positive PMI reading offers a glimmer of hope for the Indian economy amidst rising oil prices and geopolitical tensions. Positive economic indicators can help pull a large amount of foreign investment, further boosting India’s standing as a profitable place for international investors.
Experts caution that this positive momentum must be weighed against the ongoing risks associated with high oil prices and geopolitical instability. The INR is more susceptible to volatility, especially in reaction to changes in global factors. A continued increase in oil prices could more than double India’s trade deficit and possibly push inflation higher.