JOIN USA sharp fall in global oil prices is acting as a tonic for the Indian rupee. The currency hit a near three-month high on Thursday to close the day at 70.69 against the dollar, raising hopes that the current account deficit, and inflation, would be contained.
Crude oil prices fell more than 6% on Wednesday to hit their lowest level since December 2017 and were weaker again on Thursday. Oil prices are falling on account of a spurt in production by the United States, which has surpassed Saudi Arabia to become the world’s biggest producer. Oil production by other countries has also risen sharply, while global consumption is weakening, resulting in a glut and the slide in prices.
India imports 80% of its crude requirement and pays in dollars, which it buys by exchanging rupees. The lower the price of crude, the fewer dollars it needs to buy, meaning there is a greater supply of unused dollars in the market, leading to the US currency weakening. India is the world’s third-largest importer of oil.
The rupee has also been helped by a return of investor confidence after the Reserve Bank of India and the government resolved a bitter spat, and by strong interest by foreign investors in Indian stock markets.
A stronger rupee is good for importers in general, such as those who buy gold, machinery, chemicals and steel from abroad, and bad for exporters, such as software and pharmaceutical firms.
Less than six weeks ago, the rupee was inching closer to 75 to a dollar, leading to near-panic among importers and joy among software companies and owners of their shares.
A buoyant Indian currency is critical to keeping the current account deficit — the value of imports of goods and services minus exports — in check. A rough calculation by the Ministry of Finance suggests a $10 fall in the price of oil per barrel results in the deficit shrinking by $8.5 billion.
As the rupee strengthens, the rupee prices of imported goods go down, resulting in lower inflation. This reduces pressure on the Reserve Bank of India to take the unpopular measure of raising interest rates, which would result in higher EMIs for home and other loans. The RBI often raises rates when inflation is high to discourage borrowing.
The rupee has now gained for seven days in a row, appreciating 220 paise against the dollar during this period.
It is also being helped by the return of foreign investors, who pumped in nearly Rs 450 crore into capital markets on Thursday, nearly 10 times the value invested by domestic investors. Foreign fund flows in dollars are good for the rupee as the dollar is aplenty, reducing its value.