Higher oil import costs key downside risk to Indian rupee – MUFG

Analysts at MUFG Bank, point out that higher crude oil imports could lead to a larger trade deficit and weigh on the Indian rupee. They forecast USD/INR at 79.500 by the end of the third quarter and at 80.000 by the end of 2022.

Key Quotes:

“The Indian rupee depreciated for the sixth consecutive month to new record lows against the USD in June. A confluence of factors such as renewed US dollar strength, mounting fears of an “anti-goldilocks” scenario and wider trade deficits pressured the rupee lower.”

“With risk sentiments to remain weak, we see risks of further outflows from the equity market which would then add strains on the rupee. Prospects of further rate hikes by the RBI are unlikely to help stem rupee losses as real yields remain entrenched in negative territory due to high inflation for at least the next three quarters.

“Other factors that are likely to keep the rupee fundamentally weak in the coming months are the widening of trade and current account deficits as import costs of oil and other commodities become more expensive.”

“The latest available data from the PPAC show an increase in the average price of Indian basket crude oil to USD116.02/bbl in June versus USD109.51/bbl in May in part due to the increase in premiums charged by Saudi Arabia. India’s current account deficit narrowed to 1.3% of GDP in Q1 from Q4’s 2.6% of GDP, but it is likely to widen to levels above 2% of GDP again thereafter due to larger trade deficits.”

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