Crashing crude oil, dip in bond yields lift rupee

The rupee has gained 116 paise in the last two trading days, against the US dollar on the back of crashing crude oil prices, drop in the bond yields and the increased foreign fund inflow.

The rupee, in the early morning trade on Wednesday, opened over 34 paise higher against the US dollar at 70.10, after gaining a whopping 112 paise on Tuesday. Falling crude oil prices, along with the fall in the bond yields have been propelling rupee since Monday morning trade. Before closing the day’s trade at 70.40 against the greenback, rupee stabilised at 69.85 in the intra-day trade.

On Tuesday, rupee rallied by a whopping 112 paise, its best single-day gains in over five years, to settle at 70.44 against the rupee as softening crude oil prices eased concerns over India’s current account deficit expansion.

“It’s mainly because of the crude oil prices coming down and also there have been increased FPI flows,” said Kavita Chacko, Senior Economist with Care Ratings.

Oil nears a 15-month low

Brent crude hit a near 15-month low, despite the Organisation of the Petroleum Exporting Countries (OPEC) announcing 10% cut in the production, mainly on the back of an increase in the US shale oil production.

Brent prices dropped 5.6% to $56.26 per barrel on Tuesday, its lowest close since October 2017. The global benchmark crude traded at $9.75 more than the WTI (West Texas Intermediate) for the same month.

Market analysts attribute the phenomenon to the supply-demand mismatch in the global oil markets. While the US crude oil production is at an all-time high, the demand has not seen a similar growth on the back of the shift towards more viable sources of energy.

Bond yields dip

On the other hand, the government 10-year bond yield dropped to 7.223% -- a level last seen on April 4, 2018, dropping 12.4 basis points, from its Tuesday’s close of 7.347%.

Bond yield refers to the rate of return or interest paid to the bondholder while the bond price is the face value the bondholder pays. Bond prices and bond yields are inversely correlated. A rising yield is dollar bullish. A falling yield is dollar bearish.

“There was a perception in the markets that Urjit is too strict. After his exit, you are seeing a lot of positive sentiment in the markets. That is why you are seeing bond-yields going down, and rupee appreciating,” an analyst tracking the market said.

Many analysts believe that rupee is expected to remain in this range in near future. “With the fall in crude oil prices and the announcement of a pipeline of OMOs, we expect the INR to trade between 69-72 relative to the USD. However, 10-year G-sec yields are likely to range between 7.2-7.5% in the near term,” Aditi Nayar, Principal Economist, Icra said.

On the other hand, foreign portfolio investors also deposited a net of Rs 1,209.21 crore in Indian debt and equity markets on Wednesday, leading to increased demand for Indian currency against the greenback.

US Fed will be announcing key policy rates later on Wednesday. It is expected to raise rates by 25 basis points.