International crude oil prices shot up nearly 50% higher than what they were when the government drew up its budget for FY23. The rise in oil prices is expected to worsen the current account deficit, add to inflation and push up government borrowing leading to lower growth.
The domestic currency opened weak at 76.85 down from Friday’s close of 76.17 and came under sustained pressure as demand for dollars surged. The RBI managed to keep the rupee steady at 76.96 levels for the better part of the day before it briefly crossed 77. It finally closed at 76.97.
“There is no way to make a forecast as markets are not being driven by fundamentals but by the ongoing Russia-Ukraine conflict. The conflict in turn will determine the direction of oil prices. If the stand-off continues, the market will be on tenterhooks and will hedge most open risks. If the conflict settles down, oil and commodity prices would also ease. While the sanctions may continue, the markets would get more realistic. The longer the conflict persists, the more it will dent world GDP and lead to a sooner than expected recessionary trend,” said Ashhish Vaidya – Head Of Treasury – DBS Bank.
According to Pranjul Bhandari, chief India economist with HSBC If oil averages around $100 for a prolonged period, the drag on GDP growth could be up to 0.9 percentage points and inflation could rise by around 1 percentage point, and the current account deficit could widen by 1.2 percentage point.
While businesses run the risk of costlier inputs, lower demand and higher interest rates triggered by inflation, individuals could see travel and education abroad become costlier. “Business travellers and students do not have the flexibility to postpone their travel but the weaker rupee could hit leisure travel booking for the summer holidays,” said M Hariprasad, Executive Director and Business Head , Ebixcash World Money.
This is a setback to the travel industry which was expecting travel to pick up after slowing down in end-December and January due to the Omicron wave. “Student demand for foreign exchange will pick up around July-August when the fall admission starts in foreign universities,” he said.
On Monday, dealers were unwilling to take a view on where the rupee would be at end-March and most of them chose to maintain nimble positions. “India is the worst affected because we are majorly dependent on oil imports, it is not because of exposure to Russia. But if there is a ceasefire and oil retraces the rupee can become the best performer,” said Vaidya.