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How rupee has been held hostage to a 70% surge in India's crude oil bill

Rising oil prices will probably see India's current-account deficit widen to 2.6% of gross domestic product this financial year

Subhadip Sircar & Saket Sundria | Bloomberg 

What are the reasons for the five-year high trade deficit in July

Forget Turkey and Argentina. The Indian rupee’s real bugbear is the price of oil.

India’s currency had its worst month in three years in August as crude rallied on speculation sanctions on Iran will shrink global supplies. The crude import bill for the world’s fastest-growing oil user surged 76 percent in July from a year earlier to $10.2 billion. That pushed up the trade deficit to $18 billion, the most in five years.

“Dollar demand for crude heading into Iran sanctions is not helping with rupee pressures,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Demand for dollars is large, lumpy, and has been on an upward trend given the confluence of rising and actual demand pick-up for oil.”

The rupee is Asia’s worst-performing currency this year, sliding 11 percent and setting a string of record lows, most recently 72.1050 per dollar on Thursday. The pace of the decline has analysts scrambling to revise forecasts, with Mizuho changing its year-end estimate to 70.50 from an earlier prediction of 68.80.

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Brent, the benchmark of half the world’s oil including India’s, has jumped by more than 70 per cent from a low set in the middle of last year. The commodity is trading at $77.45 per barrel, a whisker below a three-year high of $80.50 reached in May.

Rising will probably see India’s current-account deficit widen to 2.6 per cent of gross domestic product this financial year, from 1.5 per cent a year earlier, according to Australia and New Zealand Banking Group Ltd.

“With the rupee having reached our year-end forecast of 71.5, the question is how much lower it can go,” head of research Khoon Goh and strategist Rini Sen wrote in a note on Wednesday. “The currency is still on the expensive side” and current fair value is around 73 per dollar, which suggests it will weaken further, they said.


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The rupee’s recent slide may have been exacerbated by month-end factors related to oil purchases, according to Commerzbank AG.

“Last week, there were reports of strong month-end dollar demand, which may have accentuated the rupee’s decline,” analyst Charlie Lay wrote in a research note published Monday. Commerzbank is in the process of revising its rupee forecast and will probably lower it, he said.

Weakness in the rupee has fueled speculation the Reserve Bank of India may revisit a policy employed in 2013 of opening a foreign-exchange swap window to meet the entire daily dollar requirements of the nation’s oil-marketing companies.

The RBI using this route will immediately remove about $600 million a day of demand from the foreign-exchange market, according to a note from Kotak Mahindra Bank. It will help reduce currency volatility but also push down reserves, it said.

For now, state-owned refiners Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Oil Corp. aren’t worried about central bank interference. The RBI hasn’t asked them to defer or stagger their dollar purchases for oil payments, an Indian Oil official familiar with the matter said last month.


Disclosure: Entities controlled by the Kotak family have a majority holding in Business Standard

First Published: Thu, September 06 2018. 15:16 IST
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