Global oil prices surged to a multi-year high on Monday after the Organization of the Petroleum Exporting Countries and its allies said they would adhere to their plan of just 400,000 barrels per day output till the end of the year.
The projected supply from the Opec falls short of expectations, especially at a time when the global economy is showing signs of recovery from the Covid-19 crisis.
Brent crude futures for December delivery on the ICE Futures exchange rose 2.5% to $81.26 a barrel, the highest level since October 2018. Meanwhile futures for November delivery on the New York Mercantile Exchange shot up to a seven-year high of $77.62 a barrel, up 2.3% from the previous close.
With high oil prices threatening to push up domestic inflation and clouding the outlook on India’s current account, the rupee and sovereign bonds took a beating on Tuesday.
On Tuesday, the rupee shed close to 0.5%, weakening to a low of 74.6350 to the dollar against the previous close of 74.3100.
Yield on the 10-benchmark 6.10%, 2031 paper rose to an 18-month high of 6.28% on Tuesday, as market participants rushed to reduce exposure on their portfolios, fearing a hawkish response from RBI at its forthcoming money policy review on Friday.
But are the markets overreacting? India does after all have a considerable war chest of foreign exchange reserves and RBI has more than displayed its strength when it comes to managing the government’s borrowing costs.
ETMarkets caught up with two experts on the Indian currency to take a look at what is the road forward for the rupee.
Anubhuti Sahay, Head of Economic Research, Standard Chartered Bank
Our forecast for the rupee by December-end is at 75.50 (per US dollar). The recent increase in crude oil prices with implications for wider trade deficit puts pressure on further weakness going forward. Having said that, ample forex reserves as well as strong FDI flow pipeline in our view is likely to contain very sharp moves despite oil trading above $80 (per barrel).
Abheek Barua, Chief Economist, HDFC Bank
I am looking at perhaps a rupee move beyond 75 (per dollar) to 75.50. That was our call; we had put 74.50 to 75.50-76.00 per dollar for December. That might just get brought forward. I think it’s a combination of a whole bunch of things.
There is a global risk-off, there is an elevation of yields in the US and of course there are oil prices. And the rise in oil prices is likely to remain for a while because there is a coal shortage and that problem is not going to go away in a hurry.
I would say the rupee might indeed cross 75.00 to a dollar and move towards 75.50. I see fairly active intervention by RBI, which is going to break that move (in the rupee). But beyond a point, RBI is unlikely to lean against the wind.
However, in terms of relative move, all other emerging markets are facing similar problems; there is a terrible selloff in the commodity currencies. If you consider that universe, I would think the rupee has every chance of being an outperformer. Which means it will depreciate less than the others.