The Indian rupee tanked 84 paise to close at a record low of 77.01 against the US dollar on Monday as the Russia-Ukraine war pushed Brent crude prices to a 14-year-high.
The local currency opened at 76.85 against the greenback and settled at an all-time low of 77.01 at the interbank foreign exchange market.
For India, the Russian invasion of Ukraine has unleashed a gloomy quadrilateral – rising crude oil prices, high gold prices, FII outflows and a weak rupee.
Foreign investors have already sold over $10 billion across India's equity markets in the first two months of 2022, according to IIFL Securities. In January, FPIs sold $4.46 billion of equities and there was additional selling of $4.71 billion in February, the brokerage said. “In Feb-22, the selling was relentless in both halves of the month. If FPIs sold $1.70 billion in the first half, they sold equities worth $3.01 billion in the second half of Feb-22.”
This comes on a day when Brent crude – the international benchmark -- soared to a 14-year high of over $130 a barrel amid reports that the US is likely to ban oil imports from Russia.
ICE Brent crude futures hit $130.89 per barrel, the highest since July 22, 2008, in early London trading.
As per an RBI research paper dated January 04, 2019, a $10 per barrel increase in oil price could raise inflation by roughly 49 basis points and increase the fiscal deficit by 43 basis points (as a percentage of GDP).
Authors of the research report, Saurabh Ghosh and Shekhar Tomar, made these observations based on the presumption that such impact would happen if the government decides to absorb the entire oil price shock rather than passing it to the end consumers. The report also says that for every $10 increase in oil price, oil trade deficit (oil import minus oil export) would go up by $12.5 billion.
The steep rise in crude oil prices will have a direct impact on India's foreign exchange outflow, fiscal deficit and inflation. The country imports around 86% of its annual crude oil requirement.
Analysts expect oil marketing companies to hike prices of petrol and diesel from this week. The government has put an informal freeze on fuel price hike amid assembly polls in key states such as Uttar Pradesh. The last ballot for the ongoing polls will be cast on March 7.
Meanwhile, SBI Research expects high crude oil prices to cost the government around ₹1 lakh crore in the next fiscal if it continues to levy the reduced excise duty on petrol and diesel. The report further said that if crude oil prices are at an average of $100/bbl., inflation is likely to increase by 52-65 basis points. Every $10/bbl increase in Brent crude price will lead to an increase in inflation by 20-25 bps, it added.
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