Why rupee is once again under pressure

Apart from surging oil prices, higher demand for the greenback from importers and banks as well as the lower opening of the equity markets have weighed on the rupee

By BusinessToday.In  
Monday, April 22, 2019

The Indian rupee, which was Asia's best performing currency over the past three months, is back to staring at the psychologically important 70 mark against the US dollar. The domestic currency fell sharply by 47 paise to 69.82 against the greenback in early trade on Monday, the lowest in over a month. On Thursday, the last working day for the forex market last week, the rupee had managed to gain 25 paise to 69.35 against the greenback after three sessions of losses.

The dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.02 per cent to 97.39. Here's a look at the factors weighing on the rupee:

Oil surge

Oil prices jumped as much as 3.2 per cent to their highest level since late 2018 on news that the United States is likely to ask all importers of Iranian oil to end their purchases or face US sanctions. Brent crude futures, the global oil benchmark, was trading higher by 2.53 per cent at $73.79 per barrel today. A source in the know told Reuters that the Trump administration will terminate the sanctions waivers it granted to some importers of Iranian oil late last year, India and China included.

In November, President Donald Trump unilaterally pulled out of a 2015 nuclear accord between Iran and six world powers and reimposed sanctions on exports of Iranian oil. However, eight main buyers had been granted waivers permitting limited purchases for six months. That window of opportunity is reportedly going to end.

Given that India is the world's third largest oil importer - we import over 80% of our oil requirements and Iran is India's third largest supplier - any hike in fuel prices inflates the import bill and disrupts the country's fiscal position.

Increased demand

According to forex dealers, higher demand for the greenback from importers and banks as well as the lower opening of the equity markets also weighed on the rupee. The BSE benchmark index was trading 309.56 points or 0.79 per cent lower at 38,830.72 in early session. The NSE Nifty, too, cracked to 0.87 per cent to 11,651.

According to Mint, bond yields also hardened in the wake of rising oil prices. However, it helps that foreign institutional investors (FIIs) remained net buyers in the capital markets, putting in Rs 1,038.46 crore on Thursday, as per provisional data.

"The reaction function of the Reserve Bank of India will be interesting as it has been protecting 70 levels," forex advisory firm IFA Global said in a report. The regulator will conduct a dollar-rupee swap auction of $5 billion for the tenor of three years on April 23.

Under the swap, banks will sell US dollars to the central bank and simultaneously agree to buy the same amount of greenbacks at the end of the swap period, which, in this case, is three years.  The dollar amount mobilised through this auction would also reflect in the RBI's foreign exchange reserves for the tenor of the swap while also reflecting in RBI's forward liabilities.

The apex bank's new tool for liquidity management was deployed for the first time last month, when it held the first-ever such auction - the RBI accepted $5.02 billion of the currency tendered by banks and, in turn, Rs 34,561 crore was infused into the banking system. The RBI said in a statement that it had received $16.31 billion in bids for the auction for which the cut-off was set at Rs 7.76. This meant that the banks that sold dollars to the RBI would get to buy back their greenbacks in 2022 at an exchange rate that includes the above cut-off premium, irrespective of the prevalent exchange rate at the time.

Rupee outlook

According to a new report by Edelweiss Securities, the outcome of the general elections next month will be a crucial rupee inflection point. "We see India's BoP [balance of payments] turning  near-neutral in FY20, and expect mild INR depreciation through the year. We see INR drifting to 73.50 by end-CY19 and see it average ~72.50 against USD in FY20," the report added.

With agency inputs

(Edited by Sushmita Choudhury Agarwal)

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