Business houses are waiting for rates to soften so that they can access cheaper credit and step up production to meet the growing consumer demand
A day after Reserve Bank of India (RBI) sharply revised downwards its inflation forecast for the second half of the fiscal, global crude oil prices fell by 2.5%, renewing expectations in the market that a cut in interest rates could be a possibility in the next policy announcement on February 5.
Business houses are waiting for rates to soften so that they can access cheaper credit and step up production to meet the growing consumer demand. RBI on Wednesday had lowered its retail inflation forecast for the second half to 2.7-3.2% from 3.9-4.5% earlier.
RBI has been hitching its lower inflation projections on food prices and on the cost of oil. The depreciating rupee will make its oil imports more expensive.
"RBI's inflation projections are lower than what we have estimated. They have said in the policy that excluding oil and food the core inflation is still sticky. But oil prices will keep inflation low," said Gopikrishnan MS, managing director of India financial markets at Standard Chartered Bank.
The rupee, which is crucial for RBI to tame inflation, fell 44 paise on Thursday over previous close. It opened weaker at Rs 70.79 against the dollar following the global sell-off in the equity market. The local currency continued to be jittery in anticipation of the Organisation of Petroleum Exporting Countries (Opec) meeting falling to 71.14 against the dollar. Following Opec's decision it erased losses, closing at Rs 70.90 against the dollar.
The fall in crude oil prices continued after the Opec decided on a production cut of 1 million barrels a day, in line with what the markets had factored in. The international crude oil prices fell 2.5% to $58 a barrel.
"The rupee is in a safe spot with the demand matching the supply at this point. Half the Iran oil payments will be done in rupees, which will take part of the demand of the oil companies from the market. But the beginning of the month there is a pent up demand from importers, from the defence sector," Gopikrishnan said.
There were also reports that the Indian government had reached an agreement with Tehran on making 50% of the oil payments sourced from Iran to be paid in dollars.
"The rupee is following crude oil prices. Making half of the oil payments to Iran in rupees rather than in dollars will also keep the rupee strong," Jayesh Mehta, managing director and treasurer at Bank of America, said
Oil payments to Iran in rupees will also lift the oil marketing companies demand for dollars from the market. This is expected to provide a cushion to the rupee to remain stronger.
Ritesh Bhansali, assistant vice-president at Mecklai Financial, said, "Rupee is going to follow crude oil prices. The initial intra-day fall of the rupee was in anticipation of the Opec meeting. And once the production cut was announced rupee retraced the losses closing stronger. The governments of both India and Iran deciding on making 50% of the oil payments in rupee will also take demand off the market."
The dollar fell against the yen on Thursday as growing investor aversion to riskier assets hit equities and pushed down US Treasury yields. The US dollar dropped 0.4 % to 112.72 yen, handing back its modest gains made overnight. MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.9 % and Japan's Nikkei lost more than 2%. The yen, often sought in times of market unrest, made strides against other peers as well said a report from IDBI Bank.
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