Oil Prices Impact USDINR Movement: Myth or Reality?

The USDINR remained volatile throughout the week as it continued to track the US dollar index under low risk market conditions. After opening at 73.68, the pair traded between 73.61 and 74.36 before ending the week at 74.12. The dollar index has moved closer to a one-year high amid rate hike expectations as many Fed members reiterated that higher inflation is here to stay longer. In fact, inflation has consistently crossed the line in most economies due to supply side constraints and can be a source of concern even for the rupee.

The US dollar has also benefited from the risk aversion mode of the market due to issues related to fuel shortages in the UK, China’s relentless crackdown on the tech and real estate sectors, and its simultaneous power outages. Many economists have slashed China’s GDP growth forecast for the current year and next year, which is not a good sign as the world’s second-largest economy is seen as one of the main drivers of global growth. In addition to the above, the return of the debt ceiling debacle in the United States worries the markets amid fears of the country’s credit default if the debt ceiling is not extended or abolished at time. Meanwhile, robust GDP data from the United States and the United Kingdom, for now, indicates that both economies will start to slow down as expected.

Besides the strength of the US dollar, a surge in crude oil prices due to a disruption in supply and demand was also cited as a major reason for the fall of the rupee. It is widely believed that higher oil prices will cause the local currency to fall, as India imports nearly 80% of its oil needs. However, historical data tells a different story.


* The US Dollar Index (DXY) is a measure of the value of the US dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound and Swedish Krona.
** Crude price movements are plotted with the secondary Y axis (left side) as a reference.

The chart above illustrates the movement of crude oil and DXY in years when the USDINR has moved more than 4% since 2004. The chart clearly shows that the annual correlation between Brent crude and USDINR has been negative; Additionally, even for shorter monthly (-0.48), weekly (-0.15), and daily (-0.02) periods, the USDINR was found to never show a positive correlation with oil price movements, as is popular belief.

For example, in 2008 Brent crude fell about 50 percent while USDINR rose 23 percent. In 2015, as crude prices were down 35%, the USDINR rose about 5%. Thus, it is evident that the huge movements in crude oil prices have not been a driver of the USDINR pair in the past. This, of course, is because currency movements are never due to a single factor. A lot of things like market sentiment, inflation trajectory, growth prospects, in fact, the overall economic situation matters more.

Naturally, the DXY, which is an index that shows the value of the safe haven US dollar against major currency pairs and therefore in a way a single point gauge for many macroeconomic factors that impact the economy. global, showed a much better correlation with the USDINR. As seen above, of the 9 instances where the USDINR moved more than 4 percent, the dollar index also reproduced a movement of more than 4 percent in the same direction 7 times.

In the current environment, while high oil prices and the strong DXY both suggest that the Indian Rupee may remain weak in the short term, as noted above, the more crucial indicator of the two would be the Dollar Index.

Meanwhile, on the home front, high-frequency indicators showed strong growth in the Indian economy with gross GST collections of Rs.117,010 crore in September, marking a five-month high and the trend is expected to rise. continue for the rest of the year. . The budget deficit figures for the end of August also suggest that the economy is on track to stay within the budget deficit target this year, having consistently exceeded it over the past 4 years.

Expected inflows in Indian stocks in the form of IPOs to the tune of Rs 35,000 to 45,000 crore in October-November will also limit the huge rise in USDINR.

Despite these positives, keeping in mind the short term risk factors in conjunction with the rising US dollar index, we can expect the USDINR pair to move sharply between 73.80 and 74, 60 with a bullish bias.

(The author is Vice President – Forex Risk Consulting at Mecklai Financial. His views are his own)


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