Informist, Monday, Oct 11, 2021
By Richard Fargose
MUMBAI – Rising Brent crude oil prices and concerns over the sooner-than-expected winding down of asset purchases by the US Federal Reserve pulled the rupee down to an over 15-month low against the dollar today.
So far in October, the Indian currency has weakened 1.5% against the dollar. Today, the rupee settled at 75.3550 per dollar, the lowest since Jul 14, 2020.
Despite worse-than-expected September US jobs data, the yield on the US Treasury notes continued to rise as investors are of the view that the US Federal Reserve is likely to begin its asset purchase tapering from November.
As investors now fear higher interest rates by next year, against the earlier expectation of rate hikes in 2023, the 10-year US Treasury yield was above the psychologically-crucial mark of 1.60%.
Narrowing the interest rate differential between the safe-haven asset and emerging market debt, makes the latter less attractive for foreign investors.
Adding to the pressure to the Indian currency, Brent crude oil prices surged beyond $84 per barrel today amid an energy crisis that has gripped major economies. Higher energy prices have already started to weigh on the economies of major oil-importing nations such as the US and India. Inflation in the US has risen to a 30-year-high as consumers pay more at fuel pumps.
India, the third-largest importer of crude oil, is likely to see a sharp increase in its import bill in the second half of 2021 as crude prices reach multi-year highs. The country imports around 4.5-5.0 mln barrels of crude oil every day to meet its domestic requirements.
According to CARE Ratings, India imported crude oil worth around $70.5 bln in the first half of the year, and considering the jump in international prices, the bill for Jul-Dec is expected to increase 11.6-12.9%.
The price of India’s crude oil basket is currently at a three-year high of $81.65 a bbl, according to data from the Petroleum Planning and Analysis Cell. The crude basket comprises Oman-Dubai sour grade and dated Brent sweet crude.
Experts have said that due to tight supply and growing demand for oil, prices may inch towards the $100-per-bbl mark in the coming months. Goldman Sachs had recently revised its forecast for Brent oil in Oct-Dec and expects the benchmark to touch $90 a bbl.
However, most participants said the rupee is unlikely to see sharp depreciation. In fact, it is expected to outperform peers such as the Brazilian real and the Russian rouble when the Fed does start tightening its monetary policy, due to huge forex reserves with the Reserve Bank of India.
“We may see the RBI step in through nationalised banks to contain volatility if the pace of rupee depreciation is brisk,” Abhishek Goenka, chief executive officer of India Forex Advisors Pvt Ltd, said in a note today.
On Friday, the RBI had said that India’s foreign exchange reserves stood at $637.5 bln as on Oct 1, close to 14 months of the projected imports for 2021-22 (Apr-Mar).
The huge forex reserves build-up by the RBI is expected to cushion the Indian unit if the foreign flow direction reverses.
In September, CLSA had said that experience suggested the rupee depreciates if the forex reserves-to-import bill cover falls to less than eight months.
India’s forex reserve-import cover was only seven months in 2013-14, when the rupee witnessed sharp depreciation after the US Federal Reserve decided to taper its asset purchase programme.
For further cues on monetary policy action by the US Federal Reserve, forex market participants are now eyeing data on inflation and retail sales in the US, as well as minutes of the Federal Open Market Committee’s meeting, due later this week. End
Edited by Avishek Dutta
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Source: Cogencis
