Indian Rupee Hits Historic Low of Rs.84 Per Dollar Amid Crude Oil Surge and Geopolitical Tensions

The Indian rupee recently reached a historic low, falling by 0.12 to trade at 84.09 against the US dollar. This decline is largely attributed to surging crude oil prices and escalating geopolitical tensions in the Middle East. The US dollar’s strength, with the dollar index rising from $100.50 to $102.40, has also added pressure on the rupee.

Experts predict that ongoing volatility in the Middle East will keep oil prices elevated, weakening the rupee further in the short term. Brent crude has surged to $78.92 per barrel, up from nearly $69 on September 30, driven by fears of potential supply disruptions due to the conflict.

The rupee’s decline has also been fueled by significant outflows from foreign portfolio investors (FPIs), who sold shares worth ₹55,000 crore in the Indian stock market over the past nine days. Jateen Trivedi of LKP Securities noted that continued foreign institutional investor (FII) outflows have exacerbated the rupee’s weakness, with further declines possible.

Impact on Gold Prices and Global Markets

Gold prices have remained strong, trading above $2,635 on Comex, and increased by over ₹400 to ₹75,750 on the Multi Commodity Exchange (MCX). Rising jobless claims and persistent inflation, driven by higher crude oil prices, have supported the positive trend.

In India’s national capital, gold prices surged by ₹1,150 to ₹78,500 per 10 grams, driven by fresh buying from jewellers and global market trends. Increased local demand, along with global factors, contributed to the rise.

Geopolitical tensions in the Middle East have also impacted global financial markets. Israeli stocks fell sharply, with the benchmark TA-35 Index dropping 3.1% before a slight recovery. The selloff extended to Egypt, as investors offloaded assets amid rising uncertainty.

Fed Reserve’s Interest Rate Outlook

Meanwhile, the US Federal Reserve has signaled confidence in cutting interest rates, with Chairman Jerome Powell suggesting that policy adjustments are likely. The Fed’s move is influenced by inflation nearing its 2% target, leading to expectations of rate cuts designed to stimulate economic growth by lowering borrowing costs.

A reduction in US interest rates could have far-reaching effects on the global economy. A weaker dollar might make US exports more competitive and affect exchange rates globally, potentially encouraging investment in riskier assets and emerging markets. However, lingering global uncertainties or a US economic slowdown could dampen global growth prospects.

Market Plunges as Middle East War Looms, Rs 10 Lakh Crore Wiped Out from Investors

Indian markets were hit hard on Thursday as escalating geopolitical tensions in the Middle East led to a sharp decline in equity indices, wiping out Rs 10 lakh crore in market capitalization.

The benchmark BSE Sensex nosedived 1,769 points (2.10%), closing at 82,497, while the Nifty 50 plunged 546 points (2.12%) to 25,250. This broad sell-off led to significant losses across sectors, with nearly 2,864 stocks ending in the red compared to just 1,120 gaining stocks.

The fallout from the day’s trading session saw the combined market value of all listed companies on the Bombay Stock Exchange (BSE) plummet by Rs 10 lakh crore, dropping to a total of Rs 465 lakh crore.

Broader Market Impact

The rout was not limited to blue-chip stocks, as midcap and smallcap segments also suffered steep losses. The Nifty Midcap 100 index fell by 1,333 points (2.21%) to 59,024, while the Nifty Smallcap index dropped 378 points (1.96%) to 18,952, indicating widespread bearish sentiment.

Sector-wise, almost all major NSE indices were deeply in the red, with Auto, Financial Services, IT, FMCG, Realty, Energy, Private Banks, and Infrastructure taking the hardest hits.

Top losers on the Sensex included L&T, Axis Bank, Tata Motors, Reliance, Maruti Suzuki, Bajaj Finance, Wipro, and Kotak Mahindra Bank. JSW Steel was the only stock to buck the trend, ending in the green.

Geopolitical Tensions and Domestic Factors

According to market analysts, the sharp downturn was primarily driven by the escalating conflict in the Middle East, particularly following Iran’s ballistic missile attacks on Israel. Fears of an intensifying conflict could potentially push up global oil prices, raising inflationary concerns.

Additionally, domestic factors played a role. New SEBI regulations in the Futures and Options (F&O) segment created uncertainty, leading to concerns over reduced trading volumes and liquidity. With foreign institutional investors (FIIs) also shifting their focus to more attractively valued markets such as China, the pressure on Indian stocks increased.

On October 1, FIIs sold equities worth Rs 5,579 crore, while domestic institutional investors (DIIs) purchased Rs 4,609 crore worth of equities, offering some support to the market.

Future Scenario

Market experts warn of further volatility in the coming days. The escalating Middle East conflict could cause oil prices to rise further, adding to inflationary pressures that could weigh on the Indian economy. At the same time, domestic factors, including SEBI regulations and foreign fund outflows, will continue to impact market sentiment.

With global geopolitical and economic uncertainties mounting, investors are bracing for a turbulent period in the markets.

Gloom All Over Markets, Sensex Down 589 Points; Middle East Conflict Rattles Globe

The escalating conflict in the Middle East, particularly between Iran and Israel, has sent shockwaves through global markets, with India feeling the tremors. The Nifty 50 index and the S&P BSE Sensex, key indicators of the Indian stock market, have both seen a decline of over 1%.

At 9.38 a.m., Sensex was down 589 points or 0.69 per cent at 83,686 and Nifty was down 174 points or 0.68 per cent at 25,622. In the early trading hour, broader market trends remained weak. On the National Stock Exchange (NSE), 256 shares were in the green and 1,188 shares were in the red.

Twenty-eight out of 30 Sensex stocks were trading in the red as Wipro, Asian Paints, Tata Motors, M&M, Maruti Suzuki, Reliance, Nestle, ICICI Bank, Titan, TCS, L&T, HUL, Kotak Mahindra Bank, HDFC Bank, Bajaj Finserv, HUL, Axis Bank and Bajaj Finance were the top losers. Only JSW Steel and Tata Steel were in the green.

Among the sectoral indices, Auto, FMCG, realty, media, energy and pvt bank were major gainers. Only the metal index was in the green. This is in line with the performance of Asian peers, which are down by 1.5%. The geopolitical tensions have left investors on edge, as any escalation could have far-reaching implications for the global economy, particularly for countries like India that are heavily reliant on oil imports.

The Middle East is a significant player in the global oil market, and any disruption in the region can lead to a spike in oil prices. This is a major concern for India, which is a significant importer of oil. Raghvendra Nath, managing director at Ladderup Wealth Management, highlighted this concern, stating, “Investors are worried about the Middle East conflict right now as it will have a huge bearing on Indian markets since any rise in oil prices will have an adverse impact on the country, which is an importer of the commodity.”

The impact of the conflict is not limited to the oil sector. Twelve of the 13 major sectoral indexes in India logged losses, with realty and auto indexes set to be the top losers by percentage, dropping about 2.6% and 1.7%, respectively. Among individual stocks, consumer goods firm Dabur lost 5.5% after forecasting its first quarterly revenue decline since 2020. Most brokerage stocks, such as Motilal Oswal Financial Services and 5Paisa Capital, fell about 1.5% each, while SMC Global lost about 2.3%.

Geopolitical Tensions and Global Oil Prices

The geopolitical tensions have also had an impact on oil prices. Crude oil prices slumped to their lowest since December, extending a steep fall of more than 4% in the previous day, amid concerns over lower global demand growth. Brent crude futures for November fell 0.53% to $73.36, after the previous session’s fall of 4.9%. US West Texas Intermediate crude futures for October were down 0.63% at $69.90, after dropping 4.4% on Tuesday. Analysts believe that oil fundamentals are deteriorating sharply, even as the market obsesses about potential supply shocks.

The geopolitical tensions have also affected gold prices. Gold prices climbed one per cent as the dollar and Treasury yields retreated following Federal Reserve Chair Jerome Powell comments signalling an interest rate cut in September. This indicates that investors are seeking safe-haven assets amid the geopolitical uncertainty.

The geopolitical tensions have also had an impact on the economies of West Africa. The upward trend in the cost of goods and services is estimated to continue for the rest of the year. The government has a year-end inflation target of 21.4%. This is highly optimistic and may not be achieved, especially if policy implementation lags are considered. In addition, for a country that is highly import-dependent, the role of the exchange rate cannot be overemphasized.

Impact on Indian Economy and Policy Responses

The geopolitical tensions have also had an impact on the Indian budget. The government projected an expenditure of Rs 47.65 lakh crore for 2024-25, marking a 6 per cent increase over the revised estimate for 2023-24. Interest payments constituted a significant portion, with 25 per cent of the expenditure earmarked for interest payments, accounting for 40 per cent of revenue receipts. Revenue growth, excluding borrowings, were expected to rise by 12 per cent to Rs 30.80 lakh crore in 2024-25, driven largely by a 12 per cent increase in tax revenue.

The geopolitical tensions have also had an impact on the global banking sector. Following a record showing in 2022, the global banking sector continued to exceed expectations during 2023. Global return on tangible equity reached 13 percent in 2023, its highest level since the 2008 financial crisis. Meanwhile, the worldwide Tier 1 ratio hit a ten-year high of 13.4 percent, and net interest margins rose to 2.4 percent, snapping a decade-long contraction.

Long-term Impact and Market Outlook

The geopolitical tensions have also had an impact on South Asia. The Iranian retaliation to the attack by Israel on its embassy in Syria in the form of a barrage of missile attacks threatens a negative impact beyond the region, especially in nearby South Asia which has historical, cultural, religious and economic ties with the Middle-East.

Israel’s attack on the Iranian embassy was a clear violation of diplomatic norms. Yet, the attack elicited no condemnation from Israel’s Western allies, in line with similar silence on Israel’s genocidal six-month war in Gaza. Similarly, in the United Nations they condemned Iran’s attacks, on the premise of self-defense, as disproportionate.

Quick Analysis: What’s Middle East Conflict’s Potential Impact on Global Economy? 4 Possible Future Scenarios

Wall Street’s main indexes opened lower on Wednesday after escalation in geopolitical tensions in the Middle East though markets are likely not to come under sway. Here’s the impact visible so far and the possible future scenarios:

  • Israeli Retaliation: Iran’s missile strike on Israel, involving 180 ballistic missiles, significantly raises the chances of an Israeli counterattack. A likely target could be Iran’s Kharg Island facility, which handles 90% of the country’s oil exports.
  • Economic Risk: If Israel strikes and Iran responds by restricting access to the Strait of Hormuz—through which 20% of the world’s daily oil supply passes—crude oil prices could surge above $100 per barrel, similar to the 2022 spike following Russia’s invasion of Ukraine.
  • Central Bankers on Edge: The U.S. Federal Reserve and European Central Bank (ECB) are closely monitoring these developments. Energy price hikes from a prolonged conflict could derail plans to reduce interest rates, potentially reigniting inflation that central banks have worked hard to control.
  • Energy Supply Shock: Despite current stability—due to minimal casualties and Israel’s potential focus on Hezbollah in Lebanon rather than direct strikes on Iran—a severe disruption in oil exports would trigger energy supply shocks. Saudi Arabia’s ability to increase oil production could soften the blow, but sustained tensions could strain global supplies.
  • Inflation Dilemma: Central banks, especially in the U.S. and Europe, struggled to manage energy shocks during the 2022 power crisis, which led to inflation spiking to high-single-digit levels. A similar surge, along with other inflationary factors like the U.S. longshoremen strike, could force central bankers into a tough choice: either continue rate cuts and risk further inflation or pause/raise rates and push the economy toward recession.
  • Investor Sentiment: As of now, markets seem unaffected by these risks. In Europe, traders expect the ECB to cut rates again on October 17, while U.S. derivative prices suggest the Fed’s rates could fall to 3% by October 2025 from the current 4.9%.
  • Geopolitical Ripple Effect: Israeli Prime Minister Benjamin Netanyahu vowed Iran would pay for the attack, while Tehran warned of “vast destruction” in case of retaliation, signaling the possibility of a wider regional conflict. Any involvement by Israel’s allies could lead to a broader confrontation, further unsettling global markets.
  • Immediate Market Impact: Oil prices have already risen by 5%, with Brent crude trading at $75.3 per barrel amid concerns about escalating tensions.

Possible Future Scenarios

  1. Surge in Oil Prices: A direct strike on Iranian infrastructure, or a disruption in the Strait of Hormuz, could send oil prices soaring above $100 per barrel. This would have immediate inflationary consequences for the global economy, forcing central banks to reconsider planned interest rate cuts.
  2. Inflationary Pressures: A prolonged Middle East conflict could trigger another energy crisis, worsening inflation in the U.S. and Europe. Central banks may be forced to halt or reverse rate-cutting plans, risking a global economic slowdown or recession.
  3. Geopolitical Instability: Any military escalation between Israel and Iran could lead to broader regional conflict, drawing in global powers and further disrupting oil supplies. This could amplify investor fears and market volatility.
  4. Delayed Monetary Easing: If inflation spikes due to rising energy costs, the U.S. Federal Reserve and ECB may delay or slow down their plans for monetary easing, prolonging high borrowing costs and hindering economic recovery efforts. Even RBI might delay its decision to ease interest rate cuts now.