The Brent crude price drop of over 30 pct since June 2014 is forecast to be favourable for the Indian economy and its currency if maintained.
The impact on the Rupee's (INR) valuation on the global forex markets is therefore likely to be positive says a note issued on the matter by Barclays in their latest FX Quarterly research note.
However, the picture is complicated as we discover in this note - the recent fall in the oil price has actually coincided with a softer INR - but it is only a matter of time before the currency benefits which will interest those with immintent Indian payments.
We find out just how the coming months are likely to play out for the Indian currency.
For your reference, the latest conversion rates are seen below:
- The British pound to Indian Rupee Exchange rate (GBP/INR) 1 GBP converts into 96.8260 INR.
- The US dollar to Indian Rupee exchange rate (USD/INR) is at 61.8750.
- The Euro to Rupee exchange rate (EUR/INR) is at 76.3519.
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Lower Oil Prices Forecasted
Barclays confirm they sit alongside a majority of analysts who are predicting further declines in the oil price.
The impact on India, an oil importing nation, will be positive owing to the lower cost of doing business and the easing of pressures on the fiscal and current account balances.
"In turn, lower oil prices should bode well for Indian assets and the INR," says the Barclays FX Quarterly.
How Lower Oil Prices Benefit India
According to barclays:
- If oil averages USD80/bbl in 2015 (compared with an assumption of a full-year price of USD110/bbl), it would result in a 1.4% of GDP improvement in Indiaโs current account balance, reducing the deficit to 0.6% of GDP.
- In monetary terms, Indiaโs current account deficit would improve by a sizeable USD30.4bn.
- The inflationary effect of lower oil prices is also significant, given that India has a 9.5% weighting of fuel in its consumer price index. Moreover, with diesel and petrol prices deregulated, the effect of lower oil prices would be relatively fast.
- in this respect, we calculate that each USD10 decline in oil prices results in a 0.7% decrease in inflation.
- The fiscal benefits from lower oil prices are not any less significant.
- Lower oil prices are helping the Indian government make a profit on its diesel under-recoveries, providing more room for the government to either consolidate its fiscal balance or to initiate spending on infrastructure.
The Rupee Exchange Rate Forecast Higher
So with benefits to the Indian economy lying ahead, the currency will ultimately have to benefit.
It is worth noting however that thus far the impact is yet to be felt which suggests rises may be around the corner.
"While the INR stands to benefit from lower oil prices, its sensitivity to Brent crude over the past three and 12 months has not been particularly high. In fact, the correlation between the INR and oil prices has been positive," say Barclays.
In other words, the INR has reacted negatively to lower oil prices of late.
Analysts have attributed this to Indiaโs central bank, the RBI, resisting FX appreciation pressure.
Indeed, Indiaโs FX reserves, and in particular its forward book surplus, have risen strongly over this period, due to such resistance to INR strength.
"Given that the positive economic benefits of lower oil prices have not been reflected in the currency, we believe that the INR looks even more attractive in terms of its medium-term potential; for more details, see FX Focus: INR: A Constructive Story, 7 November 2014. As such, we continue to hold a short EURINR trade recommendation," say Barclays.
