The rupee hit a fresh 15-month low against the U.S. dollar as importers rushed to purchase dollars after the U.S. pulled out of a nuclear deal with Iran that sent crude prices rising.
After a weak opening, the rupee hit the day’s low of 67.48 to a dollar, as compared with Tuesday’s close of 67.08, prompting state-run banks to sell dollars on behalf of the Reserve Bank, currency dealers said. The RBI has always maintained that it intervened in the foreign exchange market to cut volatility and not to target a particular level for the rupee.
The rupee ended the day at 67.27 to a dollar, a fresh 15- month low. This is the lowest closing for the rupee since February 7, 2017, when it had settled at 67.41.The domestic currency, which has depreciated more than 5% in 2018, is one of the worst-performing Asian currency this year.
According to a UBS Securities report, since India is a net oil importer with inelastic demand, global crude oil price movement tends to have an important bearing on macro stability risks and economic growth prospects.
The report said, quoting Petroleum Planning & Analysis Cell, that a $10/bbl oil price rise raises India's current account deficit by $15 billion (0.6% of GDP) and the fiscal deficit by 0.1% of GDP, if domestic fuel prices are unchanged.
Currency experts said a depreciating rupee could prompt the central bank to advance interest rate hikes.
‘3-6% depreciation risk’
“We estimate the threshold for higher global oil prices for India is $70-75/bbl, wherein macrostability risks widen but remain manageable,” Tanvee Gupta Jain, economist, UBS Investment Bank, said. “However, oil strengthening and sustaining around $75-85/bbl could undermine macro fundamentals. [Then], we see a risk of INR 3-6% depreciation against the USD from the current level and at least 50 bp policy rate tightening in FY19.”
RBI has maintained status quo in the last four policy meetings while reiterating its neutral stance. However, one of the six members of the monetary policy committee, that decides the interest rate, Viral Acharya, who is the Deputy Governor in-charge of monetary policy, said he would “likely to shift decisively to vote for a beginning of withdrawal of accommodation in the next MPC meeting in June.”
Withdrawal of accommodation would mean interest rate could only go up from now, as opposed to the neutral stance, that indicates interest rate can move either ways.
