Explained: Why surging oil prices is bad for Indian rupee

Surging crude oil prices poses a fresh threat to the Indian rupee as analyst predict a significant decline.

At present, the INR stands at 83.1736 to the US dollar, just a marginal improvement from the previous session’s 83.1850. (Photo: Reuters)

New Delhi ,UPDATED: Sep 18, 2023 12:18 IST

The Indian rupee (INR) could come under pressure and decline significantly in comparison to the US dollar, analysts have warned.

Analysts quoted in a Reuters report fear that a combination of factors, including surging crude oil prices and a rally of the US dollar index, could lead to a significant decline in the Indian currency’s value.

At present, the INR stands at 83.1736 to the US dollar, just a marginal improvement from the previous session’s 83.1850. Ever since the INR hit a record low of 83.29, the RBI has been consistently intervening to prevent a further slide.

While the central bank remains focused on defending the rupee and maintaining overall volatility, experts quoted in the news agency’s report indicate that the probability of a new low is on the rise.

This concern is primarily attributed to the surge in oil prices and the strength of the US dollar.

According to traders quoted by Reuters, the central bank is “possibly selling dollars” to prevent the INR from falling to a record low.

Oil on the boil

Brent crude, a key factor influencing India’s economic outlook, has experienced an 11.62 per cent increase this month and a substantial 29.35 per cent surge in the past 6 months due to supply concerns.

The International Energy Agency recently warned of a significant market deficit through the fourth quarter of this year.

Currently, Brent crude hovers around $93.69 per barrel, reaching levels not seen since late 2022.

Gaura Sen Gupta, economist at IDFC First Bank told Reuters that depreciation pressures on INR is “expected to be higher in the near term with crude oil prices above $90 and dollar strength”.

It may be noted that txhe US dollar index, buoyed by expectations of prolonged high-interest rates set by the US Federal Reserve, remains at its highest level since March.

Meanwhile, the continued rise in oil prices poses a risk to India’s oil trade deficit and overall balance. In August, India’s trade deficit reached a 10-month high at $24.2 billion.

Nomura, a leading financial services group, highlighted that this situation presents an “adverse terms-of-trade shock for Asia”, with countries like India, Thailand, and the Philippines appearing more vulnerable to the impact of higher oil prices.

Published On:

Sep 18, 2023

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