By Jaspreet Kalra and Nimesh Vora

(Reuters) - The Indian rupee weakened past 92 per dollar for the first time on Wednesday with ‌the central bank likely curbing further losses in Asia's worst-performing currency, as an escalating Middle East war pummelled global markets.

The rupee fell to 92.3025 to the dollar, down about 0.9% and eclipsing its previous record low of 91.9875 hit in January.

The widening Mideast conflict risks fanning inflation, hurting growth and worsening ​the current account balance in India, which imports more than 80% of its crude oil needs and ​relies on the Middle East for remittances from its diaspora. Heightened risk aversion may also ⁠drive foreign investors out of Indian equities and bonds, which also extended losses on Wednesday.

"The Middle East conflict is ​acting as a catalyst but the broader trend for the INR has been clearly on the weaker side," said ​Tanay Dalal, senior vice president for business and economic research at Axis Bank.

"The RBI would need to continue smoothing INR weakness to avoid second-round volatility effects, until a more durable equilibrium between financial inflows and outflows is achieved."

Line chart depicting the dollar-rupee pair's price action

RUPEE LAGS PEERS

The oil shock comes at ​a time when the rupee has already been under sustained pressure. The currency's more than 2% decline since the ​start of the year makes it the worst performer in Asia and one of the laggards in emerging markets, after a roughly 5% slide in 2025.

Wednesday's ‌selloff ⁠hit across asset classes as India's benchmark equity index, the Nifty 50 (.NSEI), ell nearly 2% while the country's benchmark 10-year bond yield rose 4 basis points to 6.717%.

An arrow chart with the title 'Emerging market currency moves against the US dollar'

Asian equities fell sharply, with South Korean shares diving more than 10% and the won hitting a 17-year trough. Brent crude has risen more than 13% since the war broke out over the weekend.

US TRADE DEAL OPTIMISM FADES

The ​Mideast war has pushed optimism ​around the outlines of ⁠a U.S.-India interim trade deal to the background. Market participants had hoped a pact could support the rupee with lower tariffs, boosting exports and easing pressure on the external balance.

"Remittances from ​the Middle East as well as capital flows are likely to get impacted ​in the scenario ⁠of an extended regional conflict," analysts at Kotak Mahindra Bank said in a note on Tuesday.

"In the case of an extended crisis, India’s macroeconomic outlook is expected to weaken through widening of current account deficit, higher inflation, sharper rupee depreciation and ⁠lower GDP ​growth."

The Indian economy has been chugging along at a strong pace of ​growth and contained inflation but a protracted conflict could upset the balance.

Reporting by Jaspreet Kalra and Nimesh Vora in Mumbai; Editing by Mrigank Dhaniwala and Ronojoy Mazumdar

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