Quick Take

Rupee skids to 71.5 on oil

| Updated on September 16, 2019

RBI should keep building its forex reserves and intervene in forex market only to curb volatility

Crude oil has once again roiled the currency market. Rupee opened on an extremely weak note against the dollar on Monday morning, on the news of the drone attack on Saudi oil fields. This news has given a fresh setback to the rupee that was just trying to get back on its feet.

Read more: Rupee tumbles 68 paise to 71.60/USD in early trade

The month of August was very difficult for rupee traders as renewed US-China trade war, incessant foreign portfolio outflows and panic regarding domestic economic slowdown had dragged the rupee down to 72.4. But stability returned in September with trade war tension abating and FPIs turning net buyers this month.

However, spike in crude oil prices has ushered in turbulence once again. WTI crude futures crossed the $60 mark this morning and is trading over 8 per cent higher than Friday’s close. With India depending on imported crude oil to meet 84 per cent of domestic demand, spike in prices is expected to impact the current account deficit that is at a manageable 2.3 per cent of GDP currently.

The Reserve Bank of India has done well to build its forex kitty in 2019 with the help of the two USD-INR swap auctions which helped to maintain forex reserves around the $430 billion level, even as the FPIs turned net sellers.

Also read: All you wanted to know about RBI's swap auction

Given increasing uncertainties in global markets over the ongoing trade war, Brexit and current geopolitical uncertainties, the Centre and the RBI will do well to rein in external debt of both corporates and the government. Emerging market currencies, including the rupee tend to get badly hit in periods of such extreme risk aversion. If rupee continues to remain under pressure, servicing external debt could turn problematic for companies.

The RBI should also retain its policy of intervening in forex market only to curb volatility. With other emerging market currencies too weakening in such conditions, a relatively stronger rupee is not good for our exports

Published on September 16, 2019

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