Rupee below 70/$ to be antidote for oil at $70/ bbl

Crude prices may be inching up again, but with the rupee gaining strength in the past few weeks, they are unlikely to widen the current account deficit (CAD).

Economists told DNA Money that CAD could be contained at around 2.4-2.5% of gross domestic product (GDP) despite crude prices rising to over $68 per barrel and weaker exports because rupee had appreciated to below 70 a dollar in the recent weeks.

In the Interim Budget 2019, the government has pegged CAD at 2.5% of GDP. In the quarter ended September of the current fiscal, CAD had widened to 2.9% of GDP against 1.1% in the same quarter of FY18.

In the first half of this fiscal, the difference between the foreign currency inflow and outflow rose to 2.7% of GDP from 1.8% in the corresponding period last fiscal. This was mainly due to a higher trade deficit of $50 billion, compared with $32.5 billion a year ago.

Devendra Pant, chief economist & head – public finance at India Ratings, told DNA Money a stronger rupee was offsetting the impact of rising crude on CAD.

"An appreciating currency is taking off pressure from rising crude prices (on CAD). Also, we have seen that trade deficit narrowed in February due to easing of crude prices in that month," he said.

Pant is projecting CAD to come at around 2.4% of GDP in this fiscal. "The current appreciation in rupee is providing some support and based on that we still believe that CAD will be somewhere around 2.4% of GDP," he said.

Last week saw Brent crude prices touching the highest level since November 16 at $68.20 per barrel, only to soften a bit on Wednesday. The reversal in crude prices after moderating from last year's prices of over 70 per barrel was mainly due to the voluntary restraint put on oil supply by Organization of Petroleum Exporting Countries (Opec) and its allies, including Russia.

US sanctions on Iran and Venezuela has also cut oil supply in the global market. All this has put an upward pressure on global crude prices.

Global energy research firm S&P Global Platts Analytics expects Brent oil prices to reach $70 per barrel before anticipated if Saudi Arabia succeeds in pinning down production below 10 metric million barrel per day (mmb/d).

"Saudi Arabia's announcement that April crude production will remain "well below" 10 mmb/d is another strong signal that the Saudis want to keep oil markets tight and see $70/bbl Brent oil. If Saudi Arabia continues to restrain their supply at levels below 10 mmb/d, oil balances could tighten ahead of our expectations. Brent oil prices may reach $70/Bbl earlier than anticipated," said S&P Global Platts Analytics in a report.

Bank of America Merrill Lynch is also estimating Brent crude to average at $70 per barrel in 2019.

However, a stronger rupee is likely to ward off the adverse impact of higher crude prices on CAD. After slumping to an all-time intra-day low of 74.45 a dollar in October last year, Indian currency has recovered in the recent weeks to below 69 a dollar.

This week saw rupee appreciate to 68.82 against the US dollar, becoming the best performing currency in Asia.

D K Srivastava, chief policy advisor, EY India, told DNA Money that CAD is likely to narrow to around 2.5% due to firm rupee and stabilising crude prices between $60 per barrel and $68 per barrel over the last few months.