Surge In Crude Oil Prices Ups Risk Of A Decline In Rupee's Valuation

Rising crude oil prices along with widening trade deficit have elevated the depreciation risk level for the Indian rupee.

On Monday, the international benchmark for oil prices- Brent crude futures (February)- rose 8 cents or 0.2% to $50.05 a barrel and US West Texas Intermediate crude futures (January) were up 4 cents or 0.1%, at $46.61 per barrel.

Oil prices have rallied for 6 consecutive weeks, their longest stretch of gains since June, as the vaccination campaign against COVID-19 in some large countries, including the US, have buoyed hopes that pandemic restrictions could end soon and lift demand for fuel.

The Indian rupee opened flat at 73.64 per dollar on Monday against Friday's close of 73.65 as the Indian equity market benchmarks hit another record high.

"We expect the rupee to trade strong till the time equity flows are robust," said Sajal Gupta, Head, Forex and Rates, Edelweiss Securities.

Last week, foreign institutional investors pumped in over Rs 15,000 crore into the equity markets pushing Sensex and Nifty higher while the Reserve Bank's forex reserves touch another lifetime high.

"But, risks of depreciation are rising with crude oil prices rising above $50 a barrel and rising monthly trade deficit," Gupta said.

"Brexit talks failure can also lead to some volatility in markets."

Preliminary trade data on November showed that India became a net importer in November 2020, with a trade deficit of $9.96 billion.

"The dollar has been falling as we expected and now has reached near term support," said Devarsh Vakil, Deputy Head of Research at HDFC Securities.

"We expect the rupee-dollar to correct after four weeks of appreciation and head towards 74 mark next week. The 73.4 mark remains strong support for the pair."

Data on retail inflation (Consumer Price Index) and the Wholesale Price Index for the month of November is set to release in November and could also impact the movement of the Indian currency.