Geopolitical Heat and Oil Prices: What’s Steering the Rupee Ahead of RBI MPC?

Geopolitical heat, steady currency: How Oil, RBI are steering USD/INR ahead of MPC

Mumbai, July 27

Speaking exclusively to ANI, economists and market experts said crude oil prices continue to have a direct impact on the rupee, while ruling out any sharp depreciation in the currency or immediate interest rate cuts.

Anindya Banerjee, Head of Equity at Kotak Securities, described the recent surge in oil prices as "the most artificial bull run in oil prices" in more than 20 years.

"Global supply is ample... This price surge is almost entirely driven by concerns around maritime supply bottlenecks--specifically the Strait of Hormuz... Once the Strait opens fully, prices should drop and settle between $60 and $70 per barrel," Banerjee explained.

He said that if Brent crude remains below $105 per barrel, the USD/INR is unlikely to move beyond 97.50 and could appreciate towards 94.00 as foreign capital flows strengthen.

Devarsh Vakil, Head of Prime Research at HDFC Securities, said higher crude oil prices could widen India's current account deficit (CAD) and add to inflationary pressures. However, he said the RBI's focus would remain on containing excessive volatility in the currency market rather than defending a fixed exchange rate.

"I don't think 97 absolute level is a red line. Depending upon the data and the geopolitical concerns, that level can change," Vakil said.

He projected the USD/INR to trade in the 94.00-97.00 range and ruled out the possibility of the currency crossing 100 under the current scenario.

Debopam Chaudhuri, Chief Economist at Piramal Finance, said recent movements in the rupee have closely tracked changes in crude oil prices.

"Looking at how the currency has been behaving--as we speak right now, it is back below 96--this is directly correlated to crude oil coming down from the $100-plus levels it reached late last week," Chaudhuri observed.

"So there is a direct correlation between the easing of the West Asia crisis, crude oil prices dropping back below $100, and USD/INR regaining some strength," Chaudhuri noted.

He expects the USD/INR to trade in the 94.80-95.25 range during the current quarter.

On the monetary policy outlook, analysts said persistent crude oil prices could keep imported inflation elevated, reducing the likelihood of a rate cut by the RBI in the near term.

Vakil said retail inflation could rise towards 6 per cent by December, which may prompt the RBI to adopt a slightly more hawkish stance at its August MPC meeting.

Overall, analysts believe India's strong foreign exchange reserves, easing global crude demand and expected foreign capital inflows will help cushion the economy from external oil price shocks.

— ANI