Forex market experts said that the rupee is expected to weaken further this week due to concerns about a further rise in crude oil prices and the potential impact high prices will have on India’s fiscal deficit and overall economy, in addition to rising sell-off by foreign portfolio investors in the Indian stock market.
“The rupee could face a combined onslaught of both external and internal factors in the next few days,” Rajesh Kedia, managing director of Kedia Commtrade and Research, told Arabian Business. “How the Middle East geopolitical tensions pan out in the next few days will be a major deciding factor in the movement of rupee value in the short-term.”
Kedia added that “if production [of crude] is not restored fast by Saudi Arabia, there is even a possibility of the rupee plunging to last October’s level of 74 against the US dollar.”
After Monday’s sharp fall to 71.67 to the dollar from its previous close of 70.92 on the back of a $12 rise in crude prices early Monday, the Indian currency lost further ground on Tuesday, sliding 0.26 percent to 71.80.
Experts believe that a weak Indian rupee will have a negative impact on India’s import bill, already upset by the surge in crude price.
“India has resilience for crude prices up to $70 per barrel as this price level is already monitored in the country’s budget for this year,” said Amit Kumar, oil industry expert and partner at PwC India. “A surge in crude prices beyond $70 per barrel will not only affect India’s fiscal maths, but will have a cascading effect on domestic industry and inflation.”
IFA Global, a forex advisory firm, said that “given that India relies heavily on crude imports to meet its energy needs, [the] rupee is likely to underperform. We could see a knee-jerk sell-off in domestic assets.”
“Though Saudi official have expressed optimism that normalcy would be restored soon, a sudden flare-up in Middle East geopolitical tensions will get built into the risk premium across assets,” the IFA Global note added.
Impending monetary policy decisions from the US Federal Reserve, the Bank of England and the Bank of Japan will also add to the volatility of the rupee this week, according to currency market analysts.