Rupee bulls back to market as crude oil prices start declining

The RBI’s intervention at the psychologically significant 75.50 per dollar mark two days ago and a significant drop in India’s Consumer Price Index based inflation for September also buoyed sentiment for the rupee, with the domestic currency on Thursday opening at 75.2700 per US dollar, stronger than 75.3650/$1 on Wednesday.

Brent crude oil futures for December delivery on the ICE Futures Europe exchange on Wednesday, shed 0.3 per cent to close at $83.18 per barrel, primarily as the International Monetary Fund recently flagged risks to global economic growth.

For India, the softening of crude oil prices, albeit mild, is a huge relief as the country, which is a huge importer of the commodity, faces both upside risks to inflation and pressure on the current account if global fuel prices rise.

The rupee, which has shed close to 1.5 per cent against the dollar so far this month also benefited from the fact that the RBI has started displaying its strength when it comes to expending foreign exchange reserves.

Latest RBI data showed that foreign exchange reserves were at $634.48 billion, representing an import cover of around 13-14 months, much higher than the 7-month import cover the country had during the infamous tantrums of 2014.

“Oil is coming back down, the RBI has stepped in; these are good factors for the rupee,” a dealer with a large state-owned bank said on condition of anonymity.

“Rupee will depreciate in line with EM currencies as Fed tightens, but RBI’s reserves are too big to encourage speculation. We will not see anything close to the runaway depreciation of 2013 or even 2018 because it is clear that 75.50/$1 is a line that the central bank has drawn,” he said.

Government bonds suffered Thursday as the market continued to express its disappointment over the fact that the RBI has discontinued its recent upfront purchases of government bonds.

The central bank cannot exactly be blamed as liquidity in the banking system is already at a huge surplus of around Rs 7-8 lakh crore and fresh bond purchases would lead to more accretion.

Yield on the 10-year benchmark 6.31%, 2031 paper was last at 6.33% as against 6.31% at previous close.

The market’s concerns primarily stem from the fact that the government is slated to borrow a massive Rs 12.06 lakh crores this year on a gross basis. Such a huge borrowing prgramme would require buying support from the RBI.