New Delhi: The rupee could come under mounting pressure in coming days as a strong crude oil market is hurting India’s macroeconomic stability, which could in turn spur flight of capital.
India’s current account deficit (CAD), a key barometer of macroeconomic stability for foreign investors, is especially vulnerable to oil price shock. But with Brent crude oil hitting the $80-mark this week, a development that is expected to add another $50 billion to India’s import bill, the Modi government needs permanent currency flows to cushion a potentially widening CAD.
These currency flows can come in the form of foreign direct investment (FDI) and foreign portfolio investment (FPI) in equity. Unfortunately, there are some signs of foreign investors exiting India over a number of a factors, one of which includes concerns over the current account deficit.
According to market estimates, India could see permanent foreign currency outflow to the tune of of $45 billion in 2018-19, a level not seen since 2012-13.
The rupee has fallen by more than 2% against US dollar this month. It opened at 66.452 against the greenback on May 1. The Indian currency has been on a rollercoaster since then and closed at 68.01 on May 18.
On Monday, it plunged to 67.51 against the greenback,hitting a 16-month low. Then again on Friday, it lost nearly half a percent to the dollar as fear of higher oil prices and rising US treasury yields haunted overseas investors and domestic importers.
On Wednesday, the Reserve Bank of India (RBI) had to intervene in the forex market from going on a downward spiral.
The rupee has fallen more than 6% against the dollar in 2018 after strengthening 6.4% in 2017.
In 2013, too, investors had panicked over India’s high CAD as western powers threatened to attack Syria, sending oil prices soaring. The rupee at the time fell by over 21% between June 3 and August 28, 2013.
Iran and Venezuela
The global crude oil market too remains tense on supply fears due to likely re-imposition of American sanctions on Iran over nuclear dispute. US sanctions also loom over crude production from Venezuela, adding to wider supply concerns.
The benchmark Brent crude breached the psychological level of $80 a barrel on Thursday. Oil prices slightly eased on Friday, but Brent crude still registered the sixth straight week of gains.
Meanwhile, global investment research firm Goldman Sachs has warned that India’s CAD could widen to 2.4% in 2018-19, from 1.5-2% estimated in 2017-18.
“Our commodities team expects oil prices to continue to rise over the course of this summer, before moderating slightly at the end of the year. We recently increased our 2018-19 current account deficit (CAD) forecast to 2.4% of GDP (from 2.1% of GDP earlier),” Goldman Sachs said in a research note.
Higher oil prices and lacklustre Indian exports could pressure the CAD, while global monetary tightening, domestic politics and global geopolitics could restrain capital inflows, said analysts.
A depreciating rupee will make purchase of crude oil costlier for Indian oil companies, which would in turn reflect in retail prices of petroleum products.
In its last monetary meeting early last month, the RBI had lowered retail inflation target for the first half of current fiscal to 4.7-5.1%, from 5.1-5.6% projection in February, on sharp moderation in food price rise and likelihood of a normal monsoon.
However, the renewed rally in the oil market could push inflation much higher than the RBI’s April forecast, forcing it to tighten monetary policy when it holds next monetary policy early next month.
How far RBI can go in defending the rupee?
The US Treasury has put India on its monitoring list for currency manipulation, reducing headroom for the RBI’s interventions in the forex market.
India increased its purchases of foreign currency last year and has a “significant” trade surplus with the US, the Treasury noted in its semi-annual report on foreign-exchange practices released in Washington recently.
Analysts said after the US move, the RBI will feel more pressure to refrain from intervening to stem gains in the rupee when it starts strengthening.
India’s forex reserves also fell for the fourth consecutive week, as per data released by the RBI on Friday. Analysts attributed depletion in forex reserves to RBI’s suspected interventions in the money market to prevent rupee’s slide.
Foreign exchange reserves stood at $417.7 billion as of May 11, showed data released by the RBI on Friday. Reserves slipped by $1.2 billion over the week and have declined by $6.8 billion since the end of March 2018. India’s forex reserves had peaked at $426 billion as on April 13, shows RBI data.
Saudi move to keep oil from rising too sharply?
The Organisation of Petroleum Exporting Countries (OPECs) most influential energy minister, Saudi Arabia’s Khalid al-Falih, said in a Twitter post that he had called his counterparts in the United Arab Emirates, the United States and Russia, as well as major oil consumer South Korea, to “coordinate global action to ease global market anxiety”.
Saudi Arabia said on Friday it is consulting other oil producers within and outside the cartel to ensure the world has adequate supplies to support economic growth after prices hit $80 a barrel for the first time since 2014.
Falih also said he had reassured the executive director of the International Energy Agency of “commitment to the stability of oil markets and the global economy” and that he would contact others over the next few days.
On Thursday, Falih assured India’s Petroleum minister Dharmendra Pradhan that supporting global economic growth was “one of the kingdom’s key goals”, the Saudi government said in a statement, after India expressed disappointment at the renewed rally in the oil market.