Iran-Israel conflict :Rupee plunges to a historic low

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Amidst the ongoing Israel-Iran conflict and rising fuel prices, the Indian rupee plunged to a historic low as trading opened on Tuesday, in line with dips witnessed across other Asian currencies. At the beginning of trade, rupee was valued at 83.51 against the US dollar. During the day, it further slipped 6 paise to its current level of 83.57 against the greenback. On the other hand, the dollar index rose to its highest level in almost six months, standing at 106.34, marking a 0.13% increase.

This comes amidst the concerns over rising fuel prices, which spells trouble for India, which is heavily import reliant to meet its fuel demands. An increase in fuel prices and a weakening rupee can adversely impact India’s overall economic health, forex reserves and trade balance.

Vinod Nair, head of research at Geojit Financial Services told news agency ANI , “The escalating geopolitical tensions in the Middle East, alongside supply concerns, have propelled crude prices upward, impacting overall market sentiment.”

He further said, “Indian markets may consolidate amidst worries over delayed US rate cuts, escalating Middle East tensions driving oil prices up, and subdued Q4 earnings projections.”

Here are the major concerns that would be effected with the new geopolitical development- 

As the third-largest producer of crude oil within OPEC, Iran holds significant influence over global oil supply. If tensions between Iran and Israel intensify, it could lead to severe disruptions in crude oil supply. India, being the third-largest consumer and importer of crude oil, relies on imports for around 85% of its crude oil requirements.

Given the country’s extremely high import dependency, India’s economy is highly sensitive to oil price volatility. Additionally, global inflation levels remains above central banks’ targets, and escalating geopolitical tensions could further increase commodity prices due to supply disruptions. This would hinder all efforts to control inflation and could impact the likelihood of future rate cuts.

Increasing geopolitical tensions may prompt investors to become risk-averse, potentially resulting in greater capital outflows from the market. Notably, in such tumultuous times, demand for assets which are generally considered safe-haven, like gold, dollar etc. witnesses a spike.

Global geopolitical tensions could disrupt supply chains, upsetting import-export balances and potentially pushing the Indian rupee to new lows, as is already being seen. A weakened currency can lead to increased inflation, greater capital outflows, costly imports, and reduced profits for domestic firms.