The Indian currency is “highly correlated with oil prices, which are definitely moving higher, and that’s going to make the current-account situation more difficult,” Prakash Sakpal, an economist at ING in Singapore said.
The Indian rupee may have come off its all-time low but the currency is still to see its worst toward the end of this year, according to forecasts by ING Bank NV. According to ING, the new all-time low estimate of the rupee stands at 76.50 per dollar on rising oil prices and political uncertainty ahead of state elections. An earlier estimate for the Indian currency stood at 75 per dollar.
The Indian currency is “highly correlated with oil prices, which are definitely moving higher, and that’s going to make the current-account situation more difficult,” Prakash Sakpal, an economist at ING in Singapore told Bloomberg. “Investors will also start adding the political-risk premium to the currency.”
The government is gearing up for a big test with elections in five states over the next two months which will decide the course of stock and currency market.
The currency came under severe pressure on October 11 amid outflows by FIIs and Indian market witnessing a selloff on negative global cues. It fell to its all-time low of 74.48, losing over 16% since the beginning of this year. Crude prices too crossed the $86 per barrel mark last month triggering a fall in home currency.Even as brent crude oil prices are trading below $80 per barrel, resumption of US sanctions on Iran’s oil exports could send the prices to high levels.
Currently, the currency is trading at 73.59 level after opening at 73.69 in trade today.
India is 81 per cent dependent on imports to meet its oil needs and is the third-largest importer of crude after US and China.
Since payment of crude oil prices is done in dollars, a higher crude rate leads to more amount of rupee being converted to dollar, thereby strengthening the US currency.
High current account deficit too has singed the home currency. CAD in the first quarter of this fiscal widened to $15.8 billion, which is around 2.4 per cent of the country’s Gross Domestic Product (GDP), as compared with $15 billion in the corresponding quarter a year before.
In the January-March quarter, the trade shortfall stood at 1.9% of the GDP.
The US dollar index against which the rupee value is pegged hit its all-time high of 96.98 this month displaying strength of a recovery in the US economy.