Crude oil races ahead, rupee caught in slipstream

The rupee breached the 67 to a dollar mark on Monday as crude oil prices rose to their highest since Na rend ra Mo di was sworn in as Prime Minister in May 2014. The currency closed at 67.14 to a dollar, down 0.40 percent from Friday’s close.

Brentcrude, theglobal benchmark, was trading at $75.71 by the time currency markets closed in India. Crudeoil prices had fallen to $45.25 a barrel in 2015, helping the country in its fiscal math to a large extent. Even then, the Centre could not manage to keep the deficit within the planned range. Now with oil prices on the rise, those targets look difficult for India, which imports 70 percent of the crudeoil consumed.

Foreign investors are also liquidating their positions in the Indian markets.

Foreign portfolio investors (FPIs) have been net sellers for the last 13 sessions. Therefore, both the fiscal and current account deficits will likely widen further, and the rupee is reflecting some of those pressures.

The rupee closed lower despite the domestic equity indices closing with gains, reflecting rising dollar and crude prices. The dollar index, which measures the greenback's strength against major currencies, was trading at 92.44, its highest since December last year.

All Asian currencies fell against the dollar on Monday, but the rupee's loss was the steepest at 0.40 per cent. Year to date also, the rupee is the worst performing Asian currency, having fallen 4.87 per cent against the dollar. It is unlikely that the rupee will recover anytime soon, except for some corrections. But the Reserve Bank of India is expected to increase its dollar sales in the market to cut down volatility.

According to currency consultant IFA Global, the rupee can be seen trading further lower up to 67.40-67.50 levels on weakening domestic fundamentals. It can reach 70 to a dollar if the domestic and international situation worsen and oil prices continue to rise.

But domestically, much depends on the outcome of the Karnataka elections.

While rising crude oil prices are yet to significantly disturb the retail prices of petrol and diesel, it will have some effect on inflation nevertheless. Meanwhile, food prices are showing signs of softening. This may be a comfort factor for the bond market as the RBI will not face an urgency to raise interest rates.

"The weak momentum of rising food prices and transmission of crude oil prices were weighing against the necessity of an immediate rate hike," said Aditi Nayar, principal economist at rating agency ICRA. "While a few monetary policy committee (MPC) members may vote for a change in the stance in the June 2018 policy, we see a limited likelihood of a change in the stance or a rate hike until there is greater clarity on inflation and fiscal risks, which may emerge by August 2018," Nayar said.