Economy

As high oil prices weigh on the Indian rupee, it may fall even further

In May, the rupee fell by 1.6%, the most among emerging Asian currencies.

According to analysts and forward markets, the Indian rupee’s worst is yet to come after its historic low in May.

According to analysts from UBS AG to Nomura Holdings Inc. and Bloomberg Economics, the currency could fall to between 79 and 81 per dollar (21.5 to 22 per UAE dirham) in the coming months. The rupee is being priced in at a similar level of weakness in forwards.

The bearish forecasts, which predict a 4% drop in the rupee from its current level, are based on a deterioration in India’s external finances. According to UBS, higher oil prices threaten to widen the current-account deficit to at least 3% of GDP, compared to a sustainable level of 2%, even as outflows from the country’s equity markets accelerate.

As high oil prices weigh on the Indian rupee

“It’s not a big ask for USD/INR to grind higher from here toward 80 in the next couple of months,” said Rohit Arora, emerging markets Asia strategist at UBS. “By any metric, I don’t think 80 is a runaway depreciation.” It’s a minor adjustment to a currency whose fundamentals are deteriorating.”

The rupee fell by about 1.6% in May, the most among emerging Asian currencies, prompting Reserve Bank of India Governor Shaktikanta Das to declare that the central bank will not allow the currency to depreciate too much. He added that the current account deficit can be comfortably funded this year.

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The central bank has nearly $600 billion in foreign exchange reserves, which it has been using to smooth out any volatility. Traders in the rupee are anticipating the central bank’s monetary policy review on Wednesday, when it is expected to raise interest rates following an out-of-policy hike in May.

The rupee is expected to fall to 81 per dollar by the end of November, according to Bloomberg Economics. The currency is expected to reach 79 by the end of June, according to Nomura Holdings Inc., and 79 by the third quarter, according to Standard Chartered Plc. On Friday, the currency reached a low of 77.6325.

As high oil prices weigh on the Indian rupee
As high oil prices weigh on the Indian rupee

The currency’s use as a policy tool is also linked to the debate over how much depreciation the RBI will allow. Some argue that the central bank will not tolerate a weak rupee now that inflation is the main concern. Another argument is that the rupee is still overvalued in trade-weighted terms, and that some depreciation isn’t necessarily a bad thing.

“We’ve been a little more bearish than the market because we believe the underlying balance of payments dynamics have deteriorated quite significantly,” said Divya Devesh, Standard Chartered’s head of ASEAN and South-Asia FX research in Singapore.

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