Indian rupee vulnerable to rise in oil prices

Last Friday, the Indian rupee depreciated more than 0.6 percent against the U.S. dollar to 71.80 due to higher oil prices. The rupee was the third softest performance among Asian currencies on Friday, behind only the Korean won and the Philippine peso.

This is a blunt reminder of the Asian currencies’ vulnerability to higher oil prices given that Asia in general is a net oil importer, with the only exception of Malaysia, noted Commerzbank in a research report. The completion of a recent upstream project last year signifies that Malaysia will restore its status as a net oil exporter in 2020, the first time since 2008.

Meanwhile, a sustained rise in oil prices will be more bad news for the Indian economy. In the third quarter, the economy had decelerated to a six-year low of 4.5 percent. Inflation has also accelerated to the upper end of RBI’s 2 to 6 percent inflation target range because of higher food inflation. However, this is likely to be transitory.

There is a growing debate the government might be required to provide slightly more fiscal support for the economy and relax its fiscal consolidation target. Nevertheless, increased oil prices might compromise the government’s fiscal situation given the heavy fuel subsidies.

“Higher oil prices and a weaker INR will increase the import bill which will in turn have a negative impact on both the fiscal and current account deficits. All in all, a sustained rise in oil prices leaves INR and the rest of Asia vulnerable to a further sell-off. This is likely to override the positive news from the US-China trade deal for now”, added Commerzbank.