Rupee falls sharply against US dollar today as oil prices surge: 5 things to know

The Indian rupee today fell sharply against the US dollar as oil prices skyrocketed after drone attacks on Saudi Arabia’s oil infrastructure. Other Asian currencies were also weaker against the US dollar. The rupee fell to as much as 71.45 a dollar as compared to its previous close of 70.92. Oil prices today surged to four-month highs after weekend attacks on crude facilities at key producer Saudi Arabia sparked supply fears. Opening at 71.57, the rupee traded in the range of 71.45 to 71.67 against the US dollar so far in the day. At 9:25 am, the rupee traded at 71.49 a dollar.

Here are 5 things to know about rupee dollar trade today:

1) “Given that India relies heavily on crude imports to meet its energy needs, rupee is likely to underperform. We could see a knee-jerk sell-off in domestic assets. Saudi Arabia is the second largest supplier of crude to India after UAE,” forex advisory firm IFA Global said in a note.

2) Oil prices today surged as much as 20%, its biggest intra-day percentage gain since the start of the Gulf War in 1991, after an attack on Saudi Arabian oil facilities on Saturday shut in the equivalent of 5% of global supply. A $10 per barrel spike in crude prices worsens India’s trade deficit by approximately $1.5 billion a month and pushes up consumer price inflation by 0.3%,” IFA Global added. Higher trade deficit puts downward pressure on the rupee. Indian stock market index Sensex was down about 200 points in early trade. Indian bonds also sold off, with yields the 10-year Indian government security surging 9 basis points to 6.73%. Bond yields and prices move in opposite directions.

3) While oil prices have surged, the key is the duration of the outage, say analysts. “Though Saudi officials have expressed optimism that normalcy would be restored soon, a sudden flare-up in Middle East geopolitical tensions will get built into the risk premium across assets,” IFA Global added.

“Further action on crude prices will be a function of how quickly the full capacity is restored and how coordinated the global efforts to release strategic reserves is,” HDFC Securities said in a note.

“Saudi Arabia has millions of barrels stored in locations around the world, which they can draw down to replace the lost production. A rally could also be tempered if the U.S. and other countries release oil from their strategic reserves to ease the shortfall. The Trump administration has said it is ready to deploy the nation’s emergency oil reserves and help stabilise markets if needed,” HDFC Securities added.

4) Also on focus this week will be US Federal Reserve’s policy announcement. The US central bank is expected to cut its interest rate but markets have scaled back their expectations of aggressive cuts by the Fed, IFA Global added.

Most analysts expect a quarter-point rate reduction, which would be the central bank’s second such cut after lowering rates in July for the first time since 2008. Lower US interest rates helps emerging market currencies like rupee.

5) The India government on Saturday announced more measures to stimulate the housing sector and boost exports.

India’s merchandise trade deficit inched up to USD13.5b in Aug’19 from USD13.4b in Jul’19, largely due to a 6% YoY

decline in exports during the month. Aug’19 trade deficit, however, was lower than the previous five-month average of

USD14.1b. Imports in Aug’19 declined for the third consecutive month by 13.4% YoY to USD39.6b, slightly lower than

USD39.8b in Jul’19.

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