BackThe dark side of the fall in crude prices
Currencies of oil exporters such as Russia and Norway have been the hardest hit in the past month
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The rupee might have fallen to a 13-month low against the dollar, but the currency still remains on the side of angels. As chart 1 clearly shows, currencies of oil exporters such as Russia and Norway have been the hardest hit in the past month as crude prices continue to spiral downwards. On the other hand, currencies of oil consumers such as India, South Korea and Europe have been relatively steady against the US greenback.
The rupee’s weakness could also be owing to some other short-term factors. As the year-end approaches, there is a reversal of some carry trades and the forex market in general is seeing thinner liquidity, says HSBC. Meanwhile, the Reserve Bank of India has been aggressively buying dollars to build forex reserves. This could partly be owing to the fact that the six-country real effective exchange rate is quite expensive relative to its long-term average, points out HSBC.
A weaker rupee is also a big negative for the stock markets. Note that this relationship works in the other direction as well; foreign institutional investors (FIIs) are pulling out money from Indian stocks and debt as they head for the safety of US treasuries. FIIs have been net sellers for the last six straight trading sessions in equities. On Tuesday, they pulled out another ₹ 1,247 crore, provisional data showed.
But the fall in equities is just a part of a global sell-off as chart 2 shows. Investors have been spooked by various factors. Last week, the International Energy Agency forecast a very small increase in oil demand for 2015. With falling oil prices hurting revenues of energy companies, they could find it difficult to service debt and refinance loans, in turn sparking off a credit crisis, goes one theory.
A small increase in oil consumption forecast along with other dreary economic data such as China’s flash Purchasing Managers’ Index is adding to fears that aggregate demand in China and the West is falling. This has resulted in a spike in volatility. The Chicago VIX has jumped 53% since the beginning of the month, while the US 10-year treasury yield has fallen 20 basis points to 2.03%. One basis point is one-hundredth of a percentage point.
On the flip side though, there is a chance that deflationary pressures in the West will spur another round of quantitative easing. With oil prices continuing to fall, there is a chance that the US Federal Reserve might change its stance to become more dovish. There will be some clarity on that on Wednesday.
As for India, despite price-multiples having climbed strongly, the consensus is that the country, along with the US, will show some growth in the coming year in contrast to the rest of the world. However, note that among global emerging market investors, exposure to India is now around three standard deviations above the mean relative to its history. That means there is a good chance that the country will get more portfolio flows only when a general wave of liquidity once again enters emerging markets as a whole.
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