Rupee seen hitting 74 per dollar as crude oil price boils

The Indian rupee has been left fragile after the drone attack on Saudi Arabia's crude facilities sent global oil prices soaring.

A weakening currency, a rise in oil prices and a slowdown in exports can cast a shadow on the current account and fiscal deficits, leaving further creases on the Indian economy that is struggling to revive.

The market is expecting the rupee to further soften to 74 against the dollar. A volatile rupee is forcing importers to hedge their positions against foreign exchange risk while exporters are expecting a bigger gain under a depreciated currency.

On Tuesday, the rupee opened at 71.83 to a dollar, touched a low of 71.95 and finally closed at 71.80, 20 paise lower than the previous day's low. The fate of the rupee will be decided by the way the global oil prices behave. The attack on state-owned Saudi Aramco's crude-processing facilities at Abqaiq and Khurais has halved Saudi Arabia's production, unsettling the global oil supply.

"The market is expecting the rupee to touch 73 to Rs 74 to the dollar. So importers are trying to hedge their positions while exporters are waiting to ride out this volatility to get better returns if the rupee depreciates," said Ritesh Bhansali, Vice President at Mecklai Financial Services.

The rupee is going to stay volatile for a variety of reasons, including economic slowdown and a weak global trade environment. The new influencing factor is the oil price, which had remained benign for long. "The rupee is likely to continue to underperform its emerging market peers, given its reliance on imported crude," said forex advisory firm IFA Global.

India is the world's third-biggest importer of oil. "India imports more than 80% of its oil and around two-thirds of that comes from the Middle East," HDFC Securities said in a note.

Brent crude, the international benchmark, on Tuesday traded around $68 per barrel in Asia. "Crude prices may continue to remain elevated as there are concerns over how quickly Saudi would be able to restore production," said IFA Global.

A $10 per barrel increase in global oil prices widens India's trade deficit by approximately $1.5 billion a month and pushes up consumer inflation by 0.3%, according to IFA Global estimates.

A cautionary signal was sent by the Reserve Bank of India governor Shaktikanta Das. "India's current account and fiscal deficit might take a hit if oil prices continue to rise after an attack on Saudi Arabian oil facilities over the weekend. We should allow a few more days to see how the situation plays out before taking a final view. Depending on how long it persists, it will have some impact on the current account deficit and further perhaps on the fiscal deficit if it lasts longer," the governor told a business news channel.

Data released by the commerce ministry showed India's merchandise exports declined 6.05% in August while merchandise imports dropped 13.45%, leading to the narrowing of the trade deficit to $13.45 billion.