Rupee continues to fall as India crude import bill jumps 76%

The Indian rupee continues to fall sharply against the dollar in recent days, despite gains by other Asian peers, as investors worried about the pace of its fall and a lack of strong intervention by the central bank.

The rupee is Asia’s worst-performing currency this year, sliding 11% and setting a string of record lows. On September 5th, it dropped past 72 a dollar, reaching a record 72.1050. The pace of the decline has analysts scrambling to revise forecasts, with Mizuho changing its year-end estimate to 70.50 from an earlier prediction of 68.80.

Amid a rise in global crude oil prices, geopolitical uncertainty and a decline in the rupee, fuel prices across the country have witnessed a sharp spike over the last one month. Brent, the benchmark of half the world’s oil including India’s, has jumped by more than 70% from a low set in the middle of last year. The commodity is trading at $77.45 per barrel, a whisker below a three-year high of $80.50 reached in May.

Rising oil prices will probably see India’s current-account deficit widen to 2.6% of gross domestic product this financial year, from 1.5% a year earlier, according to Australia and New Zealand Banking Group Ltd.

Brent crude trading at around $78 per barrel and the rupee trading below 71 to a dollar are a growing concern for the economy, affecting the country’s import bill and the current account deficit. A look at the fast-changing external environment and its impact on the domestic consumer and the Indian economy:

India’s currency had its worst month in three years in August as crude rallied on speculation sanctions on Iran will shrink global supplies. The crude import bill for the world’s fastest-growing oil user surged 76% in July from a year earlier to $10.2 billion. That pushed up the trade deficit to $18 billion, the most in five years.

“Dollar demand for crude heading into Iran sanctions is not helping with rupee pressures,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Demand for dollars is large, lumpy, and has been on an upward trend given the confluence of rising oil prices and actual demand pick-up for oil.”

Weakness in the rupee has fueled speculation the Reserve Bank of India may revisit a policy employed in 2013 of opening a foreign-exchange swap window to meet the entire daily dollar requirements of the nation’s oil-marketing companies.

The RBI using this route will immediately remove about $600 million a day of demand from the foreign-exchange market, according to a note from Kotak Mahindra Bank. It will help reduce currency volatility but also push down reserves, it said.

For now, state-owned refiners Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Oil Corp. aren’t worried about central bank interference. The RBI hasn’t asked them to defer or stagger their dollar purchases for oil payments, an Indian Oil official familiar with the matter said last month.

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