The Indian Rupee (INR) was lower against the US dollar (USD) on Thursday due to renewed demand for the greenback. However, the INR could strengthen as markets expect the Fed to ease policy rates next year, with the potential to cut rates around the middle of 2024.
In the meantime, the Reserve Bank of India (RBI) could intervene to prevent the INR’s volatility which might cap the national currency’s depreciation in the near term.
On Wednesday, the rupee reached its highest level in nearly two months. The rupee’s increase on Wednesday benefited from a dollar correction, as US CPI and Producer Price Index (PPI) numbers dropped, indicating that the Federal Reserve’s cycle of interest rate hikes is nearing its end. The decline of crude oil prices, along with the growing possibility of a Fed rate cut in May, weighed on the dollar.
Reserve Bank of India (RBI) could maintain its policy stance in December
The Reserve Bank of India (RBI) is anticipated to keep its hawkish policy stance at its upcoming December meeting after Tuesday’s release of October’s inflation data. The data came in within the central bank’s 2-6% target for the second successive month.
US inflation data
India’s Consumer Price Index (CPI) increased by 4.87% YoY in October from 5.02% in September, higher than the market expectation of 4.80%. Headline retail price inflation fell to 4.9% in October versus 5% prior, while India’s Wholesale Price Index (WPI) inflation came in below expectations at -0.52%. This means that India’s inflation, which is measured by the Wholesale Price Index (WPI), remained in a deflationary zone for the seventh consecutive month in October.
Manufactured products’ prices contributed to lower wholesale inflation in October, but higher crude prices could weigh on the INR as India is the world’s third-biggest oil consumer. Analysts expect the USD/INR to remain steady by year-end, with the main risk factor being higher oil prices which could weigh on the INR.
Oil prices and the rupee
A further increase in crude oil prices could push India’s current account deficit (CAD) higher and will add more pressure on the rupee moving ahead. The Israel-Hamas war has created uncertainty over crude oil prices and global economic recovery.
India imports close to 85% of its crude oil requirement so any rise in global prices will push its import costs higher and hit the rupee as large payments to buy crude are made in dollars. A weak rupee will make imports more expensive, as more rupees will be needed to buy dollars.
Lat month, petroleum Minister Hardeep Singh Puri expressed his concern over the rise of oil prices: “It stands to reason that if crude oil prices go up, that has a very strong and adverse impact on the attempts at global economic recovery … Hopefully, we will be able to navigate through everything. But this is not something on which I would like to speculate.”