Rupee Plunges 88 Paise Against Dollar Amid Escalating Geopolitical Tensions

May 10, 2025

The Indian rupee experienced a substantial drop on Thursday, closing at 85.71 against the US dollar, down from 84.83 the previous day. This drastic decline, the most significant in over two years, was fueled by escalating tensions between India and Pakistan. The rupee fell to 85.76 during the day, shedding more than a rupee from its peak earlier in the session. The day began with a rise in the rupee's value, maintaining stability until early afternoon. However, sentiments took a sharp turn around 2:30 pm following the government's announcement that Pakistan had targeted several military locations in northern and western regions, which were swiftly neutralized by India. This development was perceived as a significant escalation of the conflict, causing importers and corporates with External Commercial Borrowing (ECB) obligations to hedge their positions as a precautionary measure. Consequently, there was a surge in dollar demand, exerting downward pressure on the rupee. Forex consultants like K N Dey predicted that if tensions persist, the rupee could breach the 86 level. Dollar-rupee forward premiums also surged, with the one-year implied yield climbing to a near one-month high of 2.34%. Dealers explained that historically, the rupee has tended to weaken during periods of geopolitical unrest, such as the Russia-Ukraine conflict, which indirectly impacted India's economy. With India directly involved in the current conflict, the rupee faces heightened risks, and any further escalation could intensify pressure on the currency. The conflict's escalation also raised concerns about capital inflows, as foreign investors might adopt a cautious approach. Any depreciation in the rupee could affect other pending flows awaiting currency stabilization. Additionally, a rebound in the greenback contributed to part of the dollar's gains, as indicated by the Dollar Index climbing 0.46% to 100.07 against a basket of six major currencies. Despite these developments, Brent crude, the global oil benchmark, managed to rise by 1% to $61.76 per barrel in futures trading. Notwithstanding the current tensions, market analysts opined that if the situation does not worsen as experienced in prior conflicts, the impact could be temporary. Internationally, the dollar had faced significant declines in March and April 2025 due to reduced investor confidence arising from economic policy uncertainties and the imposition of new tariffs.

Tags: Rupee, Dollar, Forex, Stock market, Geopolitical tensions,