How will rising crude oil prices affect rupee and India's economy?
Mumbai: The rupee and attendant hedging costs to minimise the impact of its volatility have hitherto shown little susceptibility to the Middle East conflict, with investors focused on the potential retaliation by Iran to predict the pricing direction for crude oil. The rupee weakened to 86.86 per dollar Monday, before closing at 86.75/$1, about 17 paise weaker.
ADVERTISEMENT RBI likely sold dollars above 86.80/$1 levels, traders said. The rupee traded between 86.66/$1 and 86.86/$1 on Monday.
Brent crude oil prices hit a five-month peak of $81.40 per barrel earlier in the day but pared gains to be last quoted at $77.4 per barrel, according to Reuters. A rise in crude oil prices is detrimental for inflation in India as the country is a large importer of the commodity.
"The rupee fell to 86.86/$1 due to higher oil prices in the morning. Oil prices cooled a bit, rupee also strengthened, which gave importers an opportunity to buy dollars for their near term imports. However, strong dollar demand from oil companies put pressure on the currency and the rupee could not appreciate past 86.66/$1," said Anil Bhansali, head of treasury at Finrex Treasury Advisors. Traders are expecting the rupee to be in the range of 86.50/$1 to 86.90/$1 on Tuesday, assuming that oil prices do not rise substantially. "With every $10 per barrel increase in oil prices increasing India's current account deficit by 0.4% of GDP... India's current account deficit will likely rise above 2% of GDP if oil prices were to spike," MUFG Bank said in a note on June 23.
ADVERTISEMENT India's current account deficit was at 1.1% of GDP during the October-December 2024 quarter, latest data shows.
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