Mumbai: The Indian rupee and bond prices extended gains on Wednesday after crude oil prices slumped to a near 16-month low, and also after another open market operation announced by the Reserve Bank of India. The rupee opened at 70.08, rising for the third consecutive session. At 9.15am, the rupee was trading at 69.94, up 0.81% from its previous close of 70.45. The government 10-year bond yield dropped 11 basis points to 7.238% -- a level last seen on 9 April from its Tuesday’s close of 7.347%. Bond yields and prices move in opposite directions.
Crude oil prices fell over 7% to hit a low last seen on August 2017 amid concern over a supply glut and pessimism on demand due to the trade war and slowing global economic growth. Year to date, oil prices are down 15.3%. They are currently down 34.5% from their 2018 peak of $ 86.29 per barrel seen on 3 October.
“Lower oil is a clear positive for the Indian economy, even though the domestic fuel tax structure only allows partial pass-through of the sharp correction in international benchmarks", said Radhika Rao economist at DBS Bank in a 14 December note. “For India’s external balances, lower oil prices imply some reprieve on the FY19 current account and balance of payments position", Rao added.
Rao expects that if oil prices average USD75pb this year, the current account deficit is likely to stand at -2.5% of GDP, better than our forecast of -2.7%. The balance of payments deficit will narrow to USD15-20bn, vs ~USD25bn earlier. For further relief to the BOP, a deeper correction in oil prices requires to be accompanied by better risk-appetite.
The announcement from RBI on late Tuesday for further purchases of government securities under open market operations for total amount of ₹ 50,000 crore in January 2019 also improved sentiment.
Gains in Asian currencies further boosted the rupee after traders speculated that the Fed may signal Wednesday that it’s approaching a pause in its rate-hike cycle. Traders are awaiting the Fed’s guidance on the rate outlook for 2019, with policy makers widely expected to tighten for a fourth time this year at its two-day meeting which ends Wednesday
Continued buying interest from foreign investors in both equity and debt also helped the local currency. In November, FII bought a combined of $1.76 billion and so far December they bought $677 million in equity and debt.
According to Care Ratings a fair rate for the rupee based on present conditions would be around ₹ 70-71/$ assuming FPIs are positive and increasing and trade deficit under control. But with the external factor of dollar strengthening continues to play its course further, the range could be up by a rupee of ₹ 71-72/$ especially as we approach the end of the 6 month period.
So far this year, the rupee has declined 8.7%, while foreign investors have sold $4.44 billion and $7.34 billion in the equity and debt markets, respectively.