In­dia's ru­pee dilemma

The Pak Banker - - FRONT PAGE -

Af­ter fall­ing con­sis­tently against the US dol­lar for most of this year, the In­dian ru­pee has man­aged to gain some ground over the last few weeks. It has gained al­most 5 per­cent from its low­est lev­els reached in Oc­to­ber. The for­tunes of the ru­pee, which even af­ter the re­cent ap­pre­ci­a­tion is down about 11 per­cent since the be­gin­ning of the year, have been tightly linked to the price of crude oil in the global mar­kets. This is no sur­prise since im­ported oil meets about 80 per­cent of In­dia's to­tal de­mand. The value of the ru­pee tanked amid the up­trend in oil prices this year which lasted till early Oc­to­ber. Since then, the ru­pee has gained against the dol­lar in tan­dem with the fall in global crude prices. Brent Crude has dropped by a mas­sive 30 per­cent since early Oc­to­ber, when a bar­rel cost around $86, to around $60 to­day. This sharp fall has been the re­sult of a dra­matic change in mood in the oil mar­ket. In­vestors un­til a few weeks ago were wor­ried about the lack of suf­fi­cient sup­ply in the mar­ket due to dis­rup­tions in ar­rivals from ma­jor pro­duc­ers such as Iran and Venezuela. Now, how­ever, the mar­kets are wor­ried about pos­si­ble over­sup­ply as the U.S. has soft­ened its stance against Iran and turned into the largest crude oil pro­ducer in the world with the boom in shale pro­duc­tion. Wor­ries about a drop in global de­mand due to fal­ter­ing growth in ma­jor economies like China may have also con­trib­uted to the fall in prices.

The fall in global crude oil prices comes as a big re­lief to the Cen­tral gov­ern­ment, which has faced in­creas­ing macroe­co­nomic and po­lit­i­cal pres­sure due to ris­ing prices. Ac­cord­ing to UBS, a drop of $10 in the price of oil can im­prove In­dia's cur­rent ac­count and fis­cal deficits by 0.5 per­cent and 0.1 per­cent of GDP, re­spec­tively. The rul­ing party may be pleased with fall­ing oil prices in the run-up to the gen­eral elec­tions next year. Fuel prices across ma­jor In­dian cities have fallen sig­nif­i­cantly in the last few weeks. The Re­serve Bank of In­dia will be re­lieved as it will have to worry less about the ru­pee and oil-in­duced in­fla­tion. For­eign in­vestors, who have been net sell­ers this year, have turned net buy­ers this month. This points to an in­crease in in­vestor con­fi­dence in the econ­omy as the fun­da­men­tals im­prove. But amid ris­ing global un­cer­tain­ties, it may not be so easy to map what lies ahead for global crude oil prices and the ru­pee. The De­cem­ber 6 meet­ing of the Or­gan­i­sa­tion of the Pe­tro­leum Ex­port­ing Coun­tries will make clear the re­sponse of oil pro­duc­ers to the sharp fall in prices. Shale com­pa­nies are also likely to re­spond to fall­ing prices by cut­ting pro­duc­tion; the profit break-even point for shale pro­duc­ers, how­ever, is any­one's guess. In­dia should cap­i­talise on the re­lief of­fered by the fall in oil prices to im­prove its pre­pared­ness for any fu­ture jump in oil prices.

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