New Delhi | The pressure on the Indian Rupee may increase further in the coming days. On one hand, rising US bond yields and on the other hand, Brent crude crossing $ 100 per barrel, both together are creating problems for the rupee. Its effect is clearly visible on the stock market also.
Heavy selling was seen in the Indian stock market on Tuesday. BSE Sensex closed with a fall of 777.94 points or about 1.4 percent. The market’s concern is not limited to stocks only, but is also about the future situation amid weak rupee, expensive crude oil and rising US bond yields.
US bond yield and expensive oil become a big challenge
According to experts, the biggest concern for the rupee is the US 10-year bond yield crossing the important level of 5 percent. At the same time, the price of Brent crude also remains above $100 per barrel.
Rising US yields make emerging market assets relatively less attractive to foreign investors. The reason for this is the decreasing difference in interest rates (Rupee-dollar rate) between India and America. In such a situation, pressure on the rupee may increase.
Rupee at its weakest level since July
On September 15, the rupee opened at 95.75 against the dollar. By around 2:40 pm it weakened (Rupee depreciation) and reached 95.93. This is said to be the weakest level of the rupee since the end of July.
According to Dilip Parmar, Senior FX Analyst, HDFC Securities, if Brent crude and US bond yields remain at high levels, the rupee may weaken to 96.30 per dollar.
According to him, USD/INR is expected to remain in the range of 95.10 to 96.30 before the interest rate decision of the Federal Reserve. After this, the direction of the rupee will depend on Fed policy, global bond yields and crude oil prices.
Expensive crude oil is increasing the risk of rupee
India imports about 85 percent of its crude oil requirement. In such a situation, the cost of oil in the international market has a direct impact on India’s import bill.
Brent crude was trading above $107 per barrel on September 15. If oil prices remain high for a long time, India’s current account deficit may increase and downward pressure on the rupee may also persist.
Now the real question is not just how expensive crude oil will go, but how long its price will remain around $100-110.
Support received from FCNR-B deposits, but pressure continues
The rupee has definitely got some relief from foreign currency deposits i.e. FCNR-B deposits. After the measures taken by RBI, till August 31, FCNR-B deposits of $ 127.2 billion had come.
Including inflows related to foreign debt in ECB and foreign currency, the total amount reached 136.4 billion dollars. This has provided additional foreign currency to RBI to prevent further weakness in the rupee.
However, experts do not consider this a permanent solution. There is a continuous demand for dollars for the import of crude oil, due to which the pressure on the rupee has not completely ended.
The challenge before RBI also increased
The risk of inflation is increasing due to expensive oil. India’s retail inflation increased to 4.82 percent in August, whereas it was 4.45 percent in July. On the other hand, the growth of Indian economy in the first quarter was 7.8 percent.
In such an environment, it will be challenging for RBI to maintain a balance between growth and inflation. The decision of the US Fed may also impact India’s monetary policy and the movement of the rupee.
What will happen next?
If crude oil prices normalize soon and US bond yields come down, the pressure on the rupee may ease. But if Brent remains at a high level of 100-110 dollars for a long time, then the period of weakness in the rupee may last longer.
That is, at present the rupee faces two big challenges – expensive dollar and expensive oil. The actions of these two will play an important role in deciding the direction of the market and the Indian economy in the coming days.
