Rupee falls to 19-month low on rising crude oil prices

The rupee's recent recovery turned out to be rather short-lived. Since Monday, the domestic currency has plunged by 70 paise against the US dollar and is currently at a 19-month low of 68.54. This is the rupee's lowest level against the greenback since November 29, 2016.

The rupee today depreciated by 30 paise in early trade on strong month-end dollar demand from importers and banks amid sustained foreign capital outflows. Foreign investors pulled out Rs 538.40 crore from equity markets yesterday going by provisional exchange data and reports earlier this week pegged the total  net withdrawal from the capital markets (equity and debt) at over Rs 46,600 crore in the year so far.

According to traders, the dollar's strength against some currencies overseas weighed on the local unit but a higher opening of the domestic equity markets capped the losses.

Brent crude was up 30 cents a barrel at $76.61 by 0800 GMT. U.S. light crude was 25 cents higher at $70.78. A major factor weighing down the rupee is the ongoing trade turmoil between the world's two largest economies, the US and China, which continues to roil forex market sentiments.

High oil prices will stoke inflation and widen the country's current account deficit, adding to more selling pressure on the fragile rupee that risks destabilising the broader economy. India imports more than two-thirds of its crude requirements.

Fears of an escalating trade conflict between US and China have ratcheted up another notch following US President Donald Trump's recent threat aimed at Chinese investments - a move which could have great long-term consequences on the US-Sino economic ties. The hawkish commentary by the US Federal Reserve does not help matters. Neither does the latest news on the oil front.

The US asked all countries, including India, to stop all oil imports from Iran by November or risk facing sanctions. And oil prices have reportedly spiked again in the bargain. Given that India is the world's third largest oil importer, any hike in global oil prices will inflate the import bill and disrupt the fiscal position.

India's current account deficit (CAD) has already widened 42 per cent year-on-year to $160 billion in FY18, and a high deficit means the country has to sell rupees and buy dollars to pay its bills.

This further reduces the value of the rupee. In the meantime, as per RBI data, the country's foreign exchange reserves declined by around $3 billion to $410 billion in the week to June 15 due to fall in foreign currency assets.

Back in early April, it had hit a life-time high of $424.864 billion, and was cited by Asian Development Bank's Chief Economist Yasuyuki Sawada as the reason why India doesn't need to worry much about currency fluctuations. Depleting reserves may or may not cause alarm but the fact that a depreciating rupee could put inflationary pressure on the economy certainly will. So India will be hoping for a much-needed break in the days ahead.

With PTI inputs