Rupee may fall towards 68.50 in the short term as oil prices jump

By Gaurang Somaiya

Rupee consolidated in a narrow range through the week, despite strength in the dollar against its major peers, as most market participants remained cautious ahead of Opec meeting that was scheduled during the weekend.

In its annual meeting Opec decided to increase crude supply at a modest pace of 1 mbpd, but its effective increase is around 7,00,000 barrels per day. Several countries that recently suffered production declines will struggle to reach full quotas, while other producers may not be able to fill the gap.


This set a bullish tone for crude prices that were consolidating in a higher range. Most market participants expect that the 1 mbpd will not come into the market instantly, but this is less likely to happen and that could keep the prices supported on lower levels. Opec and non-Opec said in their statement that they would raise supply by returning to 100 per cent compliance with previously agreed output cuts, after months of underproduction.

Rupee failed to react, but its impact could be negative if prices consolidate in the higher range. We expect that global crude oil prices could continue to remain supported on lower levels and could keep the rupee under pressure. For the week, rupee is expected to be weighed down against the US dollar and quote in the broad range of 67.50 and 68.50.

Euro continued to remain under pressure following strength in the dollar against its major crosses and weaker than expected economic numbers from the Euro zone. Preliminary manufacturing PMI for May came in below estimates suggest that the sector grows at a slower pace.

Last week, Euro extended losses after the sell-off seen in prices post-ECB policy meeting. Dovish commentary from the ECB President triggered downside move for the currency and stronger dollar weighed more on the currency. This week, ECB economic bulletin and preliminary inflation number will be important to watch. Expectation is that inflation in June could grow at a slower pace and that could continue to keep the Euro under pressure.

India’s 10-year yield was weighed down after RBI trimmed its policy for FPIs. They are permitted to invest in Central Government securities, including in Treasury Bills, and State Development Loans without any minimum residual maturity requirement, subject to the condition that short-term investments by an FPI under either category shall not exceed 20 per cent of the total investment of that FPI in that category.

Yields remained under pressure but we expect that downside may be limited if global crude oil prices continue to trend higher. Last week, RBI policy meeting minutes suggest that officials could turn hawkish at its August meeting. The minutes highlighted the central bank’s discomfort with higher inflation. Members said that a rate increase would signal strong intent to keep inflation expectations in check.

We expect that the stance could turn hawkish but necessarily doesn’t mean that the central bank will look to raise at its next meeting as well. On the downside, India’s 10-year yield faces support at 7.71 per cent and higher resistance is at 8 per cent.

(Gaurang Somaiya is Currency Analyst at Motilal Oswal Securities)