Lower Oil Prices Bring Relief To Rupee, Bonds

The Indian currency, which until last month, was among the worst-performing currencies in Asia, has seen a turn in direction with oil prices falling and foreign investors turning net buyers of Indian debt in recent days.

The rupee gained sharply on Wednesday to trade above the 72-per-dollar mark. In early trade, the currency hit a seven-week high of 71.99 a dollar.

The rupee finally settled at 72.31 per dollar, showing a gain of 36 paise or 0.50 percent over the previous close.

The rupee gained after crude plunged 7.1 percent in the overnight session in New York after the Organization of Petroleum Exporting Countries warned demand for its crude is falling faster than expected. This was the biggest one-day drop in more than three years for crude prices.

“The current movement in the rupee is largely from the drop in international crude prices,” said Bhaskar Panda from the Treasury Advisory Group at HDFC Bank. “We expect rupee to trade in the range of 71.80 to 72.50/$ for now.”

Madhavi Arora, economist at Edelweiss Securities, said, “The rupee and bond movements are a reflection of a return in risk appetite on account of Brexit negotiations moving to the right track and positive indications from the U.S. on trade differences with China.” Though the immediate trigger for the bond and rupee movement is a steep fall in crude prices, Arora said, the upcoming Opec meeting in December is as crucial as Saudi Arabia has been asking for a cut back in supply and it remains to be seen if they reach a consensus.

The fall in oil prices comes as a huge relief for the Indian economy as India is a larger importer of crude oil. A higher oil import bill, along with a broader increase in imports, was expected to push India’s current account deficit to 2.5-3 percent of GDP this year. While the external deficit is still expected to widen, the gap may be narrower-than-feared if oil prices remain in check.

Recent days have also seen foreign investors turn net buyers of Indian debt again. Foreign investors bought a net of Rs 3,575 crore in Indian debt so far this year.

The lower oil prices, a stronger rupee and the return of foreign investors pushed up bond prices and pulled down yield. The benchmark 10-year bond yield fell to 7.70 percent in early trade. The Reserve Bank of India’s continued cash infusions via open market operation purchases of government bonds have also calmed bond markets.

“Bond yields have fallen by as much as 50 basis points so far from their peak in October, led by moderation in crude oil prices and strengthening of the rupee,” Sujoy Das, head of fixed income at Invesco Mutual Fund told BloombergQuint. “The movement bodes well for India as inflation is likely to remain low and the RBI is unlikely to raise rates in this context.”

Agreed Lakshmi Iyer, chief investment officer, fixed income and head-products at Kotak Mahindra Asset Management. “The movement is expected to keep a lid on yields for some time,” Iyer said. “Apprehensions on how macros would pan out have been put to rest for now, as has the guessing game over the RBI’s rate hikes.”

So did Arora of Edelweiss Securities. Open market operations by the RBI and sluggish government securities’ net supply aided the fall in bond yields over the past weeks, she said.

However, with inflation in check and oil prices declining, the Monetary Policy Committee may not see the need to raise rates further, economists say.

“Softer inflation profile and lower oil prompts us to revise our call for rates to be now left on hold in December,” said Radhika Rao of DBS, in a note on Tuesday.

Senior banker Uday Kotak also said if oil sustains at current levels, is “advantage India”.