Having opened the year in a position of strength, the US Dollar has softened considerably. A string of disappointing domestic data results caused futures traders to pare bets as to the timing of the first Federal Reserve interest rate hike and as an emerging-market currency, the Rupee benefits from a soft US Dollar.
Since the turn of the year, crude prices have dropped exponentially. As one of the world’s foremost crude oil importers, the cheaper prices have led to significant Rupee gains. The International Monetary Fund (IMF) has recently predicted that India will be one of the biggest gainers of all the emerging market economies thanks, in no small part, to the declination in black-gold.
Over the past year, the Indian Rupee to Pound Sterling (INR/GBP) exchange rate has traded within the range of 0.0096 to 0.0109.
In the past month, however, the Rupee has seen significant losses despite the fact that the US Dollar is still trending in a soft position. Most of the declination can be attributed to oil prices gaining with no sign of a return to bearishness.
Against the Pound Sterling, for example, the Rupee dropped from 0.0109 to 0.0103 in April. This is an even more significant declination when you consider that the Pound has also been trading bearishly amid political uncertainty as the general election fast approaches.
The upsurge in crude price can be connected to a drop in US rig counts and geopolitical tensions in Yemen. Michael Hewson, chief market analyst at CMC Markets, said: ‘Overall we are in an upwards trend and we do appear to have found a short-term base. There’s a good chance we could see $70 a barrel [for Brent] over the course of the next month or so.’
The detrimental effect of higher crude prices on the Indian economy was evidenced by March’s Balance of Trade which saw the deficit widen to $-11.79 billion from $-6.8 billion.
One positive for the Rupee is caution from many commodities experts who predict that the rising crude price is temporary, and oil will soon return to trending lower. ‘Sustaining the recent oil price rally requires firmer demand and a tangible supply response,’ Barclays analysts said in a note. ‘The cart is moving ahead of the horse, and we take a cautious view on further price appreciation over the near term.’
For those invested in the Indian Rupee, tracking oil prices and US Dollar strength will be key in the days ahead.