Since February 21, the rupee has lost 2.17% to the dollar, closing at 76.17 on Friday. Periods of unprecedented turbulence over the past few decades prove odds are rather short on the local currency retreating further, with the Reserve Bank of India (RBI) likely deploying its record forex pile to cushion the shock.
“India’s trade deficit has been high (about $20 billion a month for the past six months) on a broad-based import surge,” Jefferies said. “The sharp oil price rise will add to it. At $90/barrel average crude, we estimate FY23 CAD (current account deficit) at 2.8% of GDP…Forex reserves at $633 bn provide support to the RBI to manage a gradual INR depreciation.”
Theoretically, a declining rupee helps enhance India’s export competitiveness, although higher oil prices could accentuate the impact of imported inflation if the currency were to slide further.
Retail fuel prices in India have remained unchanged even while global crude prices surged past triple-digit marks for the first time in eight years after Moscow’s attack on its neighbour.
“The revision in auto fuel prices has been on pause since Nov’21 and at US$110/bbl, the govt. will have to raise prices by ₹14-15/ltr (12-15%) if it completely passes through the oil price rise,” Jefferies said. “The impact would be ~60-80bps on CPI…We note that the potential price hike in fuel is likely to be spread out over a few weeks.”
In the one month after the US Twin Tower attacks in 2001, the rupee dropped 1.32%. During the Gulf War, the rupee fell 0.39% in the first month since August 2, 1990, although India was far less integrated with the global economy then. After the nuclear tests in May 1998, the rupee slid about 6% in a month.
To be sure, however, some believe that the absence of a concrete template makes directional calls prone to errors.
“The decision-making driver in the war is human psychology and politics – not economics,” said Ashhish Vaidya, managing director at DBS Bank India. “In such uncertain times, it is prudent to lie low.”
The one-month Bloomberg Implied Volatility Index has surged about 240 basis points to 7.26%, show data compiled by ETIG.
“This is the peak of unpredictability since the second world war,” said Bhaskar Panda, executive vice president at HDFC Bank. “It is extremely difficult to take any directional call in times of such volatility.”
The perception of risks has increased, with some veterans saying tighter integration with the global economic order makes taking directional calls more difficult than ever.
“In my career spanning across four decades, I have never seen such an unprecedented volatility due to any geopolitical turmoil,” said KN Dey, managing partner at United Financial Consultants. “Even during the Pokhran/Kargil event, instability in the markets was much less than what it is today.”
