West Asia conflict to spark volatility in forex markets, pressure on Rupee

MUMBAI: After a relatively firm Feb, the rupee is likely to start March on a volatile note as global capital shifts toward safe-haven assets amid escalating tensions in the Gulf region. Dealers expect pressure to build from both portfolio outflows and concerns over India’s trade deficit and energy supplies, given the region’s central role in crude imports and merchandise trade.Dealers said that the typical response of global capital is to seek safe haven and money is expected to move to short-term US treasuries where yields have already crashed.High oil prices besides being inflationary will also put pressure on India’s current account deficit since most of India’s energy requirements are met through imports.“The rupee is likely to open lower at 91.25. It’s not just oil or portfolio outflows — the Gulf region is central to India’s trade flows, so any escalation there adds another layer of pressure. I expect a gap-down opening, but it’s hard to put levels on it because once key stop-losses get triggered, the move can accelerate quickly. “The RBI will likely step in to smooth volatility, but the question is not whether it intervenes, it’s how much of the reserves it is willing to use if outflows persist,” said KN Dey a forex consultant. “Besides oil prices, if there is a gap down opening in the equity markets, that will also spook the currency markets,” said a dealer. Bond yields are likely to rise as pressure on the currency will make it difficult for RBI to keep markets flush with liquidity to enable full transmission of interest rate cuts.