Oil on edge, rupee steady: How geopolitics and RBI are lifting the currency ahead of Monetary policy committee meeting

Rupee has spent months reacting to every twist in the Middle East conflict and every jump in global crude oil prices. But analysts now believe that the currency could be entering a more stable phase, with no sharp depreciation expected ahead of the Reserve Bank of India‘s (RBI) Monetary Policy Committee (MPC) meeting in August. Instead, they see the currency continuing to move in line with global crude oil prices while trading within a broadly stable range.Economists and market experts told ANI that fluctuations in global crude oil prices remain the biggest influence on the rupee. While sustained high oil prices could increase inflationary pressures and widen India’s current account deficit (CAD), they ruled out both a steep depreciation in the currency and any immediate interest rate cut by the RBI.Oil prices hold the keyAnindya Banerjee, head of equity at Kotak Securities, said the recent rally in crude prices has been driven more by supply route concerns than by any shortage of oil.“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.According to him, if Brent crude remains below $105 per barrel, the USD/INR pair is unlikely to rise beyond 97.50. Instead, the rupee could strengthen towards 94.00 as foreign capital inflows improve.No fixed line for rupeeDevarsh Vakil, head of prime research at HDFC Securities, said higher crude oil prices could put pressure on India’s external balances by widening the current account deficit and adding to inflation. However, he said the RBI is more likely to focus on preventing excessive volatility in the currency market than on defending any particular 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 expects the USD/INR pair to remain in the 94.00-97.00 range and does not see the currency breaching the 100 mark under the present circumstances.Rupee moving with crudeDebopam Chaudhuri, chief economist at Piramal Finance, said recent movements in rupee have closely reflected 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 between 94.80 and 95.25 during the current quarter.Rate cut hopes remain limitedAnalysts also said elevated crude oil prices could keep imported inflation high, making an interest rate cut less likely in the near term.Vakil said retail inflation could rise towards 6 per cent by December, which may prompt the RBI to take a slightly more hawkish approach at its August MPC meeting.Despite the uncertainty around oil prices, analysts believe India’s strong foreign exchange reserves, easing global crude demand and expected foreign capital inflows should help cushion the economy from external oil price shocks.