Oil prices are falling and that’s great news for the Indian Rupee

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  • The Indian Rupee fell 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 oil prices, 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 government as it struggles to meet its fiscal deficit target. 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.

Meanwhile, the RBI won’t have to worry as much in the short-term about dipping into its forex reserves or keeping inflation in check. This, in turn, will increase the likelihood of interest rates being kept on hold at the next meeting of the central bank’s Monetary Policy Committee next month.

However, the decline in oil prices will not go down well with the Organization of the Petroleum Exporting Countries (OPEC). If the OPEC countries decide on a production cut to contain the global oil prices it could spell trouble again for the currencies of oil importers like India. On the other hand, with the US Federal Reserve expected to pause on its rate hikes in 2019, that could lead to a continued increase in foreign capital inflows in emerging markets.


SEE ALSO:

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