MUMBAI: The rupee closed at 85.71 against the dollar, down from 84.83 on Wednesday – its worst day since Feb 2023. The currency hit a low of 85.76 during the day, falling more than a rupee from the day’s high.The rupee rose at the start of the session and remained steady until early afternoon. However, around 2:30pm, sentiment changed following govt’s announcement that Pakistan targeted several military locations in the northern and western regions, which were neutralised by India. Dealers said this was seen as an escalation of the conflict. Equity markets, which were in the green until then, also saw a sharp fall after the statement.Some dealers are forecasting that the rupee could breach the 86 level if tensions continue.“Importers delayed buying dollars, anticipating the rupee would strengthen further. However, after govt confirmed that multiple locations were targeted by Pakistan and that India responded, the situation was seen as an escalation, prompting importers and corporates with ECB obligations to hedge their positions. This led to increased demand for dollars, putting pressure on the rupee,” said K N Dey, a forex consultant who advises corporates.Dollar-rupee forward premiums also jumped, with the one-year implied yield rising 16 basis points (100bps = 1 percentage point) to a near one-month high of 2.34%. “Historically, the rupee weakened during periods of geopolitical tension, such as the Russia-Ukraine conflict, when India faced indirect economic impacts. Now, with India directly involved in the current conflict, the rupee faces heightened risk, and further escalation could significantly increase pressure on the currency,” said Dey.Dealers said the escalation of conflict could hurt capital flows if foreign investors turn cautious. The resulting weakening of the rupee would also affect other flows waiting for the currency to stabilise. Part of the dollar’s gains on Thursday were also due to a rebound in the greenback. The dollar index, which measures the greenback’s strength against a basket of six currencies, was trading 0.46% higher at 100.07.Brent crude, the global oil benchmark, rose 1% to $61.76 per barrel in futures trade.However, given that similar conflicts in the past have not escalated, dealers believe the impact may be temporary. Internationally, the dollar declined sharply in March and April 2025, reflecting reduced investor confidence due to economic policy uncertainty and the impact of new tariffs.