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Falling rupee may get RBI cushion amid rising oil, trade war

Rupee may continue to remain under pressure due to depreciating yuan and a stronger dollar

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Trade war, perceived as the biggest risk to the markets now, has set the tone for a stronger dollar. More so against the Chinese Yuan, which has depreciated by 6% over the last month and a half. In response to US threats of trade tariff, the Chinese central bank has cut bank reserve rates, guided government deposit rates lower and infused the system with additional liquidity, thereby orchestrating the large yuan depreciation. Other Asian currencies, including the rupee, have also depreciated against the greenback, although to a lesser degree. The rupee closed at 69.05 to the dollar, the lowest ever, last Thursday. Global factors have played a more prominent role in the recent fall in rupee. While Indian equities hover close to its highs, dollar continues to be bought against the rupee. Higher oil price weighed on the local currency with the trade deficit in June standing at a five year high of $16.6 billion. Oil imports were up by a whopping 56.6% YoY at $12.7 billion. 

Upbeat economic data from the US augurs well for further rate hikes and dollar strength across the board. As we write, the dollar index makes its third attempt to break the 95.5 resistance level. Latest projections from the Atlanta Federal Reserve Bank’s forecasting model show that US economy is likely to have grown by 4.5% in the June quarter. On the other hand, President Trump has criticised the Federal Reserve for raising interest-rates too fast, which can create downward pressure on the dollar index.

Oil traded off lows after Saudi Arabia dismissed rumors that it will oversupply demand as “without basis” and said it “does not to try to push oil into the market beyond its customers’ needs”. Brent oil futures had traded at $71.19 a barrel on Thursday, much lower than the levels of $80 a barrel last week, on US President’s comments which threatened to sell stock piles of the US Strategic Petroleum Reserves (SPR) to bring down international oil prices.

Fears of an escalating trade war, depreciating Chinese yuan and a stronger dollar will continue the pressure on rupee. Even though the levels of 69 and higher are an open territory, further weakening in rupee should be gradual as the RBI would attempt to contain the pace of rupee depreciation. The downside in the pair would be restricted to 68.25.

LITTLE RESPITE

  • Higher oil price weighed on the local currency with the trade deficit in June standing at a five year high of $16.6 billion 
     
  • Upbeat US economic data may fuel more rate hikes and strengthen dollar across the board

The writer is senior group president - financial markets at YES Bank

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