A sharp fall in global crude oil prices on Wednesday saw the rupee recovering much of its lost ground but economists reckon the appreciation is at best for the short term.
The reason — the rupee is facing multiple headwinds. The primary one is that it is closely linked to crude oil. But an increase in interest rates in the USA and renewed US sanctions on Iran are equally weighing on the currency.
The rupee recovered by 42 paise to 73.15 against the US dollar in early trade on Wednesday as the crude fell by about 4% overnight.
Brent crude was down $75.16 a barrel on Wednesday, its lowest since August after Saudi Energy Minister Khalid al-Falih said that Saudi Arabia was ready to boost crude production to maintain balance in the global oil market. Following this, the rupee staged a recovery. However, lost over 6 paise at close.
“It is a welcome sign,” said Gaurang Somaiya, currency analyst at Motilal Oswal Securities but stopped short of giving a medium to long-term outlook on the rupee, saying more clarity on the currency will emerge only after November 6 when the mid-term elections in US and sanctions on Iran’s oil are done with.
The foreign institutional investors have pulled out close to $7.5 billion from the Indian market from September till date. They have withdrawn from equity as well as debt. Looming trade wars too are a potential risk.
Motilal Oswal Securities expects the rupee to stabilise between 72.80 and 74.20 in the next couple of weeks.
N R Bhanumurthy, professor at the National Institute of Public Finance and Policy too believes that rising interest rates in the US could pressure the rupee until the Reserve Bank of India decides to increase interest rates back home. He said the interest rate differential is currently in favour of the US dollar and a lot of capital is flowing into that market.
The biggest dent in India’s foreign exchange reserves in seven years indicates that either too much foreign capital has flowed out or RBI has aggressively sold dollars to save the Indian currency. The reserves dropped by $5.14 billion between October 6 and October 12, their biggest weekly fall since November 2011.
Finance Minister Arun Jaitley, however, has promised more steps to stabilise the rupee in coming days. According to him the depreciation in the rupee and high CAD were transient factors that affected India, but the long-term capital flows are still intact. The rupee, which has been on a declining trend for the past six month, fell to its lowest level of 74.48 against the US dollar on October 11. According to finance ministry officials, the government may also try to tap foreign funds to stem the fall in the rupee should the need arise.