The surge in oil prices from
the intensifying Middle East war is making it costlier for
Indian importers to hedge currency exposure, with higher rupee
volatility and rising forward premiums pointing to heightened
caution over the currency’s near-term outlook.
BY THE NUMBERS
An over 12 per cent rally in oil prices to their highest level in
just under two years has lifted dollar/rupee forward premiums
and volatility expectations, especially in the near tenors.
One-month implied volatility climbed to 5.6 per cent,
the highest since May 2025, while the implied interest rate on
the one-year dollar/rupee forward premium rose 8
basis points to 2.87 per cent.
Another sign of pressure on the rupee is the shift in risk
reversals, which have flipped from negative to positive, meaning
dollar call options now trade at a premium to rupee put options.
WHY IT’S IMPORTANT
The rise in volatility and forward premiums matters for
Indian importers because it directly increases the cost of
hedging their dollar payments.
Importers usually hedge through forwards or options to lock
in exchange rates. Rising forward premiums increase the cost of
forward hedges, while higher implied volatility raises the price
of options used for protection against further rupee weakness.
CONTEXT
The conflict in the Middle East has widened following
Israeli and US strikes on Iran, unsettling investors. The
rupee weakened past 92 to the US dollar on Wednesday
to an all-time low.
WHAT’S NEXT
For importers considering whether to raise hedge ratios, the
duration of the conflict will be crucial, analysts say. A
prolonged conflict could push hedging costs higher.
QUOTE
“How long the conflict lasts will be critical for markets. A
short-lived military campaign, coupled with oil prices remaining
contained, would help mitigate downside risks to Asian
currencies,” MUFG Bank said in a note.
Published on March 4, 2026