MUMBAI: The sudden fall in global crude oil prices is propping up more things than just the stocks of motor-fuel retailers. The rupee should retrace lost ground against the dollar if Saudi Arabia were to raise output further, triggering a meaningful slide in India's energy costs.
“Lower crude prices will be a positive for the Indian economy at large and will reflect in the currency too,” said Vijay Santhanam, head of risk solutions group, Barclays India. “Crude prices have moved lower….this and the stabilizing dollar index have been positive for the rupee.”
The rupee Tuesday gained as much as 0.42% to 68.28; it later lost some ground to close at 68.46 to a dollar, up 0.16%. Brent crude oil prices slid 9% over the past week on expectations of higher production by Saudi Arabia. Mitigating trade spat concerns have also acted as a tailwind to risk assets in Asia.
“One will need to observe how the recent news on increased crude supply plays out (and its impact) on pricing in the medium term to gauge the sustainability of the strength in the currency,” Santhanam said.
The dollar index, which measures the unit against other major currencies, has been hovering in the range of 94.46-94.72, with no signs of wild swings.
Lower oil prices help narrow Indias current account deficit, or excess of overseas spending over revenues, as the country meets three-fourths of its oil needs through foreign shipments.
"Speculators have taken a pause as they have stopped cutting long-dollar deals, particularly in the overseas non-deliverable forwards market,” said Anindya Banerjee, currency analyst at Kotak Securities. “The trickle-down effect is supporting the rupee back on the home turf, with many …unwinding their earlier positions in the forwards market. The rupee is likely to gain strength unless crude prices surge suddenly. "
Non-deliverable forwards (NDF) refer to an offshore currency derivatives market in which the Reserve Bank of India has no direct control.
Dealers expect the rupee to trade in the range of 67.50-68.50 in the next few trading sessions. The rupee hit a record low at 69.09 a dollar on June 28, extending the local units losses to more than 7% this year.
“The sentiment in the currency market has turned positive for now amid falling oil prices and bond yields,” said K N Dey, founder United Financial Consultant. “Exporters, too, are unwinding their earlier short-positions on the rupee.”
The benchmark bond yield dipped seven basis points to 7.73% Tuesday but closed at 7.75%, erasing some of its gains. Bond yields and prices move in opposite directions.
“Falling crude oil prices, coupled with a gaining rupee, have helped restore investor confidence,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts. “The risk of higher inflation fades away, diminishing the possibilities of an immediate rate increase. Also, bond yields seem to have topped with no signs of a further rise.”
If the rupee weakens against the dollar, it is inflationary as it increases the rupee stock in the system. In turn, it prompts the central bank to raise interest rates. If rates are increased, existing debt securities lose value.