From 74.5 to 72 a dollar in a month, rupee’s jump explained in 5 points

The rupee (INR) jumped sharply today against the US dollar (USD), buoyed by a big drop in global oil prices. Overnight, the prices of oil, India’s biggest import item, fell nearly 7% amid worries of weakening global growth and increasing supply. The rupee hit a high of 72 a dollar today, as compared to its previous close of 72.67. The rupee has held on to most of its gains today, trading at 72.18 against the US dollar at 2:40 pm. The rupee had gained 22 paise to close at 72.67 against the US dollar Tuesday.

5 things to know about rupee’s gain vs US dollar

1) Combined with Tuesday’s drop, global oil prices are down over 25% since early October in what has become one of the biggest declines since prices collapsed in 2014. Oil markets are being pressured from two sides: a surge in supply and increasing concerns about a global economic slowdown. US crude production hit a record 11.6 million bpd (barrels per day, making the United States the world’s biggest oil producer ahead of Russia and Saudi Arabia. Most analysts expect US output to climb above 12 million bpd within the first half of 2019. US President Donald Trump has urged OPEC not to cut production to support crude prices after Saudi energy Minister indicated that a production cut would be required to balance the oil market. “Trump’s remarks are likely to weigh on OPEC’s decision on oil production in its December meet,” forex advisory firm IFA Global said in a note.

2) Oil is India’s biggest import item and according to Bloomberg, the government estimates it will pay a record $125 billion, or Rs 8.8 lakh crore, for crude imports this fiscal year, the highest in rupee terms since 2001. Easing of global oil prices will ease the pressure on India’s fiscal as well as current account deficit.

3) On concerns of impact of rising oil prices on India’s current as well as fiscal deficit, the rupee had hit a record low of 74.4825 per dollar on October 11, when Brent crude had rallied above $85 on supply concerns. The government had to resort to hiking tax on import of some items to stem the current account deficit. India’s current account deficit had widened to a four-quarter-high at 2.4% of gross domestic product (GDP) in April-June period on the back of rising crude oil prices.

4) Relieving some pressure on rupee, foreign investors have started to return to India’s markets after several months of aggressive selling, prompted by falling crude oil prices and the RBI’s move to ease a liquidity squeeze. Foreign institutional investors (FIIs) have started to return to Indian markets. They bought nearly $1.26 billion in debt over the last nine trading sessions (between 24 October and 5 November) and have been buyers in all sessions except one during this period, according to Bloomberg data.

5) Despite the recent turnaround in the rupee’s fortunes, the Indian rupee is still down over 11% against the US dollar so far this year. Foreign investors have sold $5.72 billion and $7.87 billion in the equity and debt markets, respectively.
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