Oil prices are falling and that’s great news for the Indian Rupee
Dilsher DhillonNov 23, 2018, 07.04 PM
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- The Indian
Rupeefell below the 71 mark to 70.69 against the US Dollar on 22 November, a significant improvement over the all-time low of 74.4 in the second week of October.
- The rupee’s appreciation is largely due to the fall in global
oilprices, a consequence of the rise in global supply and the Trump administration’s decision to grant waivers to eight countries, including India, from sanctions for their purchases of Iranian oil.
- The decline in oil prices and appreciation of the rupee will bring a modest relief for the Indian
governmentas it struggles to meet its fiscal deficittarget. It will also ease pressure on the Reserve Bank of India, which has been dipping into its forex reserves to prop up the rupee.
After the hullabaloo caused in recent months about the Indian Rupee’s dramatic depreciation, it seems that the Indian government can rest easy for the time being. The rupee fell below the 71 mark to 70.69 against the US Dollar on 22 November, a significant improvement over an all-time low of 74.4 in the second week of October.
The main reason for this reversal in fortune? Falling oil prices.
The global price of Brent Crude has fallen from an annual high of $86.80 a barrel on 3 October to the current level of $62.30, which has been a blessing for India as it imports around 70%-80% of its oil requirements.
This is largely a consequence of the rise in production from Saudi Arabia, the US and Russia as well the Trump administration’s decision to grant waivers to eight countries, including India, from sanctions for their purchases of Iranian oil. Prior to the waiver, it was widely expected that the sanctions on Iranian oil would drive global prices up even further.
As oil prices were rising prior to October, India was having to pay more for fuel, which led to the the widening of the country’s current account deficit and hence, leading to a weaker rupee. This was compounded by a surge in outflows of foreign capital, which has also reversed in November.
The decline in oil prices and appreciation of the rupee will bring a modest relief for the government as it heads into an election year. That is because it now has a better chance of meeting its fiscal deficit target of 3.2% of GDP for 2018-19.
However, the decline in oil prices will not go down well with the Organization of the Petroleum Exporting Countries (OPEC). If the
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