Rupee vaults on back of low crude prices

The Indian rupee has gained146 paise in the last 30 hours against the US dollar on the back of low crude oil prices, increased foreign fund flow and Urjit Patel’s resignation as the Reserve Bank of India (RBI) governor.

The rupee, in the early morning trade on Wednesday, opened over 34 paise higher against the US dollar at 70.10, after gaining 112 paise on Tuesday. Falling crude oil prices, along with the fall in the bond yields have been propelling rupee since Monday’s morning trade.

Yesterday, 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.

The currency further gained strength as it passed 70 per US dollar mark. It touched an intraday low of 69.89 per US dollar.

“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.

Brent crude hit a 14-month low of $ 58.26 per barrel, despite the Organisation of the Petroleum Exporting Countries (OPEC) announcing 10% cut in the production. 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.

On the other hand, the government 10-year bond yield dropped to 7.238% -- a level last seen on April 9, dropping almost 10.9 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 amount of money the bondholder pays for the bond. 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.

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

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 between69-72 relative to the USD. 10 year G-sec yields are likely to range between 7.2-7.5% in the near term,” Aditi Nayar, Principal Economist, Icra said.