Rupee's taking a knock as the US-Israel war against Iran enters its fourth week with little signs of likely de-escalation - with the usual Trumpian doublespeak. Oil prices are now 50% higher than when hostilities began, which is straining foreign investor outlook about India's growth prospects. Capital flight out of Indian equities is adding pressure on rupee as the energy shock props up safe-haven demand for dollar. RBI has no preset level to defend for rupee. Yet, the central bank's intervening to ensure an orderly descent. Rupee's not the worst performer among the emerging market pack that's vulnerable to a sustained rise in energy prices. Forex reserves are down on both central bank intervention and higher dollar demand from oil refiners.
The Indian currency's trajectory will be shaped by how the country addresses its vulnerabilities to the energy shock. Dollar is also currently valued beyond a justifiable level as a safe haven. It's reacting to signals of escalation that keeps the situation fluid for RBI - the greenback dipped on Trump's decision not to bomb Iran's power infrastructure a day after he threatened to do so if Iran doesn't let go of its chokehold on the Hormuz Strait. RBI is comfortable with current level of reserves. It will have additional reason to keep interest rates on hold while it assesses the impact of the energy shock on growth and inflation. Incomplete transmission of fuel price increases will weigh on downside risks to growth.
Sustained high energy prices will widen India's current account deficit, and increase the food and fertiliser subsidy burden. RBI may have to delay monetary easing as it smoothes out rupee volatility. Short positions on Asian currencies have moved higher, while speculative activity in the oil futures market could be spilling over into the forex market. RBI will have to tackle heightened volatility as a precondition to stabilising their economies. Indian companies' forex hedges tend to favour limited volatility at a low cost. These are being upturned by big rupee movements.
The Indian currency's trajectory will be shaped by how the country addresses its vulnerabilities to the energy shock. Dollar is also currently valued beyond a justifiable level as a safe haven. It's reacting to signals of escalation that keeps the situation fluid for RBI - the greenback dipped on Trump's decision not to bomb Iran's power infrastructure a day after he threatened to do so if Iran doesn't let go of its chokehold on the Hormuz Strait. RBI is comfortable with current level of reserves. It will have additional reason to keep interest rates on hold while it assesses the impact of the energy shock on growth and inflation. Incomplete transmission of fuel price increases will weigh on downside risks to growth.
Sustained high energy prices will widen India's current account deficit, and increase the food and fertiliser subsidy burden. RBI may have to delay monetary easing as it smoothes out rupee volatility. Short positions on Asian currencies have moved higher, while speculative activity in the oil futures market could be spilling over into the forex market. RBI will have to tackle heightened volatility as a precondition to stabilising their economies. Indian companies' forex hedges tend to favour limited volatility at a low cost. These are being upturned by big rupee movements.
