News Analysis

Rupee tumbles to all time low on rising oil prices

Gurumurthy K BL Research Bureau | Updated on June 28, 2018

Currency likely to remain under pressure

The Indian rupee tumbled to its all-time low of 69.09 at the opening trade today. Though the currency has recovered from this low, it is likely to remain under pressure and fall to fresh lows in the coming days. At about 4 pm, it was trading at 68.76 against the US dollar.

The crude factor

The major factor which has been dragging the rupee all through this year is the sharp rise in crude oil price. The movement of rupee, since the beginning of this year, has a strong negative co-relation with the crude oil prices. The surge in the West Texas Intermediate (WTI) Crude Oil from around $58 per barrel in January to a $72 in May dragged the rupee lower from around 63.5 to 68.5 over the same period.

Subsequently, the fall in oil prices from $72 to $64 on expectations that the Organization of Petroleum Exporting Countries (OPEC) will increase production gave a breather to the Indian rupee. The currency recovered from around 68.5 to 66.9. The Reserve Bank of India’s intervention was also one of the reasons for the rupee’s recovery.

However, the sudden reversal in the oil prices after the OPEC meeting failed to meet the market expectation, has brought the rupee under pressure again. The OPEC last week decided to increase the supply, but less than what the market had expected. This triggered a sharp upward reversal in the oil prices. The WTI crude oil has sky rocketed 12 per cent since Friday after the OPEC meet from around $65 to $73 per barrel. This in turn has dragged the rupee from its level of 67.83 on Friday to a record low of 69.09 today.

Other factors

Increase in crude oil prices has seen the oil import bill surging for the country. Oil imports has surged 25 per cent in last financial year (2017-18) to 108.7 billion from around $87 billion in the previous fiscal. Oil forms around 27 per cent of India’s total imports on an average. Surging oil imports has increased the trade deficit about 44 per cent from $109 billion in FY17 to $157 billion in FY18. This in turn has more than tripled the Current Account Deficit (CAD) from $15 billion in FY17 to $48 billion in FY18. As the oil prices continue to rise, the deficit is likely to widen in the coming fiscal, dragging the rupee to fresh lows in the coming months.

The second important factor that has been keeping the rupee under pressure is the foreign money outflow. Foreign portfolio investors (FPIs) have been on a selling spree in the Indian debt segment since February. They have offloaded $6.1 billion worth Indian debt so far this year. Two more rate hikes are expected from the US Federal Reserve for the rest of the year. As such, the FPIs may continue to take money out of the country which in turn will keep the rupee under pressure.

Published on June 28, 2018

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