Rupee gets a crude shock as tensions rise in Middle East

Mumbai: Geopolitical disturbances are the new headache for the Indian currency which is already facing headwinds from narrowing interest-rate differentials and growing worries over likely fiscal slippages.

Mounting tensions in the Middle East have the potential to choke two pipelines – crude oil and worker remittances back home. At risk are jobs and fund transfers from the region, and prices of motor fuels in a country that imports 80 per cent of its energy needs. Globally, crude oil is already at a two-year high, and an incremental price increase by one dollar threatens to inflate India’s import bill by $1.5 billion.



“Rising crude is certainly not good news for India,” said Shashikant Rathi, executive vice-president and head of treasury at Axis Bank.

“Global geopolitical tensions may stoke a sense of risk-aversion, adding to the dollar’s strength. Traders are unlikely to take risky bets, and the currency market is going to be choppy in the next few weeks,” Rathi pointed out.

In the past week, the rupee fell 62 paisa, or about 1 per cent, to the dollar as crude oil prices continued their uptrend in the aftermath of the Saudi purge, and on expectations that the planet’s biggest oil exporters would extend an output cut beyond the initial deadline of March. The local unit may lose a further 1-1.5 per cent against the greenback in the next two to four weeks, say dealers.

The Indian Basket of Crude Oil Prices (daily) — an index that represents India’s average buying costs — climbed about 15 per cent to more than $62 a barrel in the past one month, show data from Bloomberg.

“The rupee would be under pressure undoubtedly. Importers are on alert, given the way global conditions are panning out,” said Bhaskar Panda, senior VP, treasury, HDFC Bank. “But overseas inflows (from investors) may prevent wild swings.”

Last week, Saudi Arabia instructed its citizens to leave Lebanon, a move that raises concerns of a possible economic crisis in the region. That does not bode well for global crude prices, or India’s fiscal arithmetic.

“Apart from impacting sentiment, the prospects of a higher current account deficit will influence decisions,” said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc in Mumbai. “Traders will be hesitant to take fresh positions amid global uncertainties and the approaching year-end.”

India’s current account deficit (CAD) is expected to be around $40 billion, or 1.5 per cent of gross domestic product (GDP) for this financial year, Nomura said in a report. The gauge increased sharply to $14.3 billion — 2.4 per cent of the GDP — at the end of the April-June quarter of 2017-18.