In line with the slump in oil prices, the rupee recovered sharply on Thursday and triggered stop-losses in the month-end currency futures segment.
The fall in oil prices not only enables the government to contain the fiscal deficit as promised, it also helps the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to anchor inflation within its target range and prevents another rate hike in the December 5 policy announcement.
The rupee opened at 71.12 a dollar, and closed at a near three-month high of 70.69. The above 1 per cent intra-day movement was the sharpest among major Asian currencies. The foreign exchange market was closed on Wednesday.
The dollar index, which measures the dollar’s strength against major global currencies, fell 0.21 per cent to 96.51.
Meanwhile, the yield on the domestic 10-year bonds also fell 8 basis points and closed at 7.71 per cent. Bond prices and the yield move in opposite directions.
The retail price of petrol has come down by Rs 8.03 a litre as of November 22 since touching a high of Rs 84 in Delhi on October 4, following which the Centre announced a cut in the excise duty. The price of diesel, which had risen to Rs 75.45, has since come down to Rs 70.97. The benchmark Indian crude oil basket came down to $62.49 a barrel on the last closing as against the October average of $80.08. An SBI report says if oil stabilises near $65, the current account deficit will reduce to 2.6 per cent of GDP from the earlier estimate of 2.8 per cent.
The easing of global crude prices has come as a relief for the finance ministry. Finance Minister Arun Jaitley has committed to meeting the fiscal deficit target of 3.2 per cent for 2018-19 without compromising on capital expenditure. Officials say the easing of crude prices will give more breathing space, especially in terms of subsidy rollovers.
The Centre’s budgeted petroleum subsidy outlay for the current fiscal was Rs 250 billion. However, by the end of September, the petroleum ministry’s internal estimates put the figure at Rs 460 billion, a jump of around 85 per cent.
While that figure may come down slightly when the revised estimates are presented in the 2019-20 budget, the figure is still expected to be much higher than the budgeted estimates. “The Centre will have to roll over a lower amount in oil and fertiliser subsidies than it would have had to had crude oil stayed around $80,” said a government official.
“A year-low oil price is more beneficial for India than peers, in addition to soft US rates. As long as oil price remains low, both the currency and rate will complement each other and the MPC will be at ease, given their primary mandate is anchored with headline consumer price inflation,” said Soumyajit Niyogi, associate director, India Ratings and Research.
The rupee’s strength also helps the RBI as increasing rates was one way of fighting a portfolio outflow.
The rupee remains the worst-performing currency in the region on a year-to-date basis. It has, however, gained 4.056 per cent in a month — second only to the Indonesian rupiyah. The rupee has strengthened of late, and gained more than 3 per cent over the past seven sessions.
According to currency dealers, Thursday’s movement was largely on account of illiquidity, as many foreign investors were off, ahead of the long weekend.
However, the movement did take domestic investors and some foreign banks by surprise, which scampered to cut their long dollar positions in the futures market. Traders incurred significant losses in the futures segment after stop-loss levels were triggered.
Major oil-producing nations will meet in Vienna on December 6 to decide on production levels. Some cut in oil production is expected, and if substantial — say, 1.6-2.0 million barrels — it should negatively impact the rupee. The expectation for now is a reduction of 1.0-1.4 million barrels per day.
In the interim, the RBI’s purchase of dollars may keep the rupee under pressure.
“The RBI buying may not allow the rupee to appreciate, while the Organisation of Petroleum Exporting Countries meeting may put pressure on the rupee. So, there could be a depreciation bias,” said a senior currency dealer with a foreign bank.
For now, dealers are seeing the rupee at 70.5-71.0 a dollar as these levels are attractive for the RBI to build up its lost reserves.
The RBI’s forex reserves were at $426 billion in mid-April, but fell to $393 billion as of November 9.
The fiscal math
Normally the government compensates the companies for their subsidies on liquefied petroleum gas (LPG) and kerosene. If subsidy is be rolled over for at least six months, it may bring an additional interest burden of Rs 8-9 billion on oil-marketing companies like Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL).
Even with lowering crude oil prices, a rollover of subsidies and some cuts in administrative expenditure have to happen as there is pressure on the fiscal deficit due to higher than expected spending on a number of items and anticipated shortfall in sources of revenue like the goods and service tax.
As reported earlier, the Centre could face a shortfall of more than Rs 1 trillion in its share of the goods and services tax, and could see additional expenditures of more than Rs 450 billion. Apart from a higher oil subsidy burden, the central government’s internal spending estimates show that it expects an additional outlay of Rs 200 billion just for the newly announced minimum support price obligations for cereals and pulses. This will be over and above the budgeted food subsidy estimate of Rs 1.69 trillion.
The government has also announced that it will provide an additional support of Rs 20 billion for state-run carrier Air India, over and above the Rs 163 billion announced in the Budget. As reported earlier, the outlay for Ayushman Bharat could increase by Rs 35 billion.
When it comes to fuel subsidy payments, the full amounts aren’t released till the audited data comes in from the oil ministry. So a lot of the payments go out in April and May of the next fiscal year, officials say.