The Indian rupee just clocked its highest one-day gain since 2013 as global oil prices plummeted to a yearly low

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• The Indian rupee posted its highest one-day gain since September 2013 on 18 December, rising a whole ₹1.12 against the US dollar to close at ₹70.44.
  
• It was no coincidence that the global prices of crude oil fell to one-year lows the very same day.
  
• After depreciating by nearly 14% in the year to October 2018, the rupee has been on a strong run as of late as oil prices have fallen and foreign capital has been rerouted to Indian markets.
  
• On account of paying less for oil, India’s trade deficit has improved. It fell from $17.13 billion in October 2018 to $16.67 billion last month.
  

Domestic investors got an early Christmas present as the Indian rupee posted its highest one-day gain since September 2013 on 18 December, rising a whole ₹1.12 against the US dollar to close at ₹70.44. It was no coincidence that the global prices of crude oil fell to one-year lows the very same day.

After depreciating by nearly 14% in the year to October 2018, the rupee has been on a strong run as of late as oil prices have fallen, exporters have sold more dollars and foreign capital flows have been rerouted to Indian markets. After mostly steering clear of India in the middle third of the year, foreign institutional investors pumped ₹62 billion into India in November and around ₹30 billion this month so far.

The rupee also got a boost as bond markets rallied following an announcement by the Reserve Bank of India (RBI) that it would inject a total of ₹1 trillion worth of liquidity into Indian markets in December 2018 and January 2019 through government bond purchases.

India’s government can also breathe a sigh of relief. On account of paying less for oil, India’s trade deficit has improved in recent months as well. It fell from $17.13 billion in October 2018 to $16.67 billion last month despite a rise in oil imports, as per data from India’s commerce ministry.

Oil prices have been on a steady decline since October owing to excess production by a number of countries like Saudi Arabia, the US and Russia and continued exports from Iran. A report released by the US’s Energy Information Administration, a government agency, indicated a significant jump in shale-oil production, which will likely counterbalance efforts by OPEC countries to roll back production of crude oil starting next year.

Despite a strong run by the Indian rupee of late, not everyone is bullish about the currency’s prospects. Earlier this month, Fitch, a ratings agency, predicted that the rupee would depreciate to 75 against the US dollar by the end of 2019. The agency pinned its forecast on expectations of continued interest rate increases by central banks in developed nations and a widening of India’s current account deficit.


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