Indian currency hostage to oil as import bill jumps 76%

Forget Turkey and Argentina. The Indian rupee’s real bugbear is the price of oil.

India’s currency had its worst month in three years in August as crude rallied on speculation sanctions on Iran will shrink global supplies. The crude import bill for the world’s fastestgrowing oil user surged 76 per cent in July from a year earlier to $10.2 billion.

That pushed up the trade deficit to $18 billion, the most in five years.

The rupee is Asia’s worst-performing currency this year, sliding 11 per cent and setting a string of record lows. Rising oil prices will probably see India’s current-account deficit widen to 2.6 per cent of gross domestic product this financial year, from 1.5 per cent a year earlier, according to Australia and New Zealand Banking Group.

“With the rupee having reached our year-end forecast of 71.5, the question is how much lower it can go,” head of research Khoon Goh and strategist Rini Sen wrote in a note on Wednesday. “The currency is still on the expensive side” and current fair value is around 73 per dollar, which suggests it will weaken further, they said.

Weakness in the rupee has fuelled speculation the Reserve Bank of India may revisit a policy employed in 2013 of opening a foreignexchange swap window to meet the entire daily dollar requirements of the nation’s oil-marketing companies.

The RBI using this route will remove about $600 million a day of demand from the foreign-exchange market, according to a note from Kotak Mahindra Bank.