Rupee suffers rout as surging oil casts its dark shadows

The embattled rupee witnessed a virtual free-fall - plummeting sharply by a staggering 67 paise to end at a fresh 16-month low of 68, against the US currency on heavy dollar demand amid global macro challenges.

The Indian rupee hit news headlines during the week, after breaching the key psychological 68-mark for the first time in 2018, as surging global crude prices reinforced fuel inflation concerns and interest rate hikes, consequently impacting growth.

The forex sentiment wobbled after the crude prices broke the psychological threshold of $80 a barrel - spurring a fresh wave of dollar demand from state-run oil marketing companies fearing a further depreciation in value of rupee.

Traders also reported hedging-related demand as importers rushed to pay forward premium, putting additional pressure on the local currency.

The rupee sell-off accelerated against the grim back drop of surging global crude prices and growing concerns over widening twin deficits even as foreign-investors reduced their rupee-dominated exposures.

The rupee is Asia's worst performing currency this year on concerns that slowing capital flows and a wider trade deficit could stretch the funding of India's current account gap.

Emerging market currencies too remained under pressure as the US Treasury yield consolidated above the 3% threshold.

The domestic currency oscillated between a high of 67.21 and a low of 68.15 a dollar during the week, though it had enjoyed a brief respite witnessing a mid-week rebound.

Meanwhile, after a brief pause the dollar came back with a vengeance, reaching fresh multi-month highs against other rivals amid highly bullish US macroeconomic data.

Crude prices fell back after topping $80 a barrel mark impacted by sanctions on Iran and lack of Capex from historically major producers like Venezuela are causing a blow-out in the spread between the US crude futures contract and the international benchmark.

Brent crude futures, an international benchmark, ended at $78.50 a barrel.

The domestic bonds markets suffered some volatility during the week with the benchmark 10-year G-sec (7.17% 2028) yield rose to 7.83% from 7.73% previously.

Indian bonds weakened to multi-year lows as global crude oil prices surged and local inflation data came in higher than expected.

In the meantime, foreign investors have pulled out Rs 12,671 crore ($2 billion) from the Indian capital markets, in the last eight trading sessions due to surge in global crude prices and rise in yields of government securities here.

The country's foreign exchange reserves decreased by $1.237 billion to $417.702 billion in the week to May 11, Reserve Bank data showed.