Higher oil prices to weigh on Indian and Pakistani rupees

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Indian and Pakistani currencies are likely to remain under pressure chiefly due to higher oil prices in the international market, experts say.

Analysts and currency experts say that the US dollar has been on a roll in 2022 and strengthened its position. Its growth leaves no room for currencies of emerging economies and developing nations, which then incur significant losses. Higher inflation in the US and other major economies reinforce fears of a global recession on assumptions of an aggressive rate hike by the Federal Reserve. They said the dollar index continues to remain strong to its 20-year high against major currencies and ultimately caused some depreciation in the currencies of emerging economies.

Global economic slowdown

Samiullah Tariq, head of research and development at Pakistan Kuwait Investment Company, said Indian and Pakistani currencies would remain under pressure in the short term due to the global economic slowdown, rising inflation and higher energy costs.

"Higher oil prices are expected to put pressure on the Indian and Pakistani rupees as both are major importers of oil to fulfil their energy needs," Tariq told Khaleej Times on Tuesday.

Replying to a question, he ruled out sharp fluctuations in both currencies and said the Pakistani rupee should be stable around 58-60 against the Dirham. The Indian rupee should fluctuate between 22.5 and 23 versus the UAE currency.

The Pak rupee, which hit an all-time low of 239.71 to a US dollar on September 22, remained highly volatile since March and shed approximately 24 per cent of its value against the greenback and other major currencies this year. It recovered significantly since Finance Minister Ishaq Dar took charge of his office and found that the rupee is undervalued at 240 to a dollar.

In early trading on Tuesday, the Pakistani rupee dropped to 219.5 against the US dollar (59.81 versus the dirham). It closed 218.89 against the dollar (59.64 versus the dirham) on Monday.

Rate hike, oil weigh

Vijay Valecha, chief investment officer at Century Finacial, said the combo of aggressive Fed hikes and higher crude oil prices has pushed the Indian rupee lower against the greenback.

"At the same time, RBI is likely to be cautious this time around, as it has already spent a substantial sum to defend the rupee. The decline in forex reserves has been quite steep during the past few months, but it is not alarming as they are still deemed adequate," he said.

He said the RBI had raised interest rate by 190 basis points (bps) since May to keep inflation and the rupee in check, while the US Federal Reserve hiked rates by 275bps during the same period and is expected not to stop until a terminal Fed fund rate of 4.50 per cent is reached by March 2023.

"General consensus for the RBI’s next hike seems to point to 50bps from the initial 35bps forecasted, in favour of protecting the rate gap between India and the US. In spite of this more than-expected rate hike, the rupee may remain subdued as the interest rate differential remains high," Valecha said.

"The RBI is likely to be cautious regarding interventions in the currency market, having spent $100 billion to defend the currency. As a result, the near future of the rupee is forecasted to remain gloomy and could slide to 83.50 against the US dollar (22.75 versus the UAE dirham, where we could see some RBI intervention," he said.

The Indian rupee, which lost almost 11 per cent of its value this year, traded in a stable range at 82.25 against the dollar in early trading on Tuesday. It closed unchanged at 82.35 against the dollar (22.43 versus the dirham) on Monday.

Maker experts anticipated RBI intervention in the forex market and said the rupee is expected to trade in a narrow range in the near future.

"The RBI will keep the currency around 82.40 levels against the dollar (22.45 against the dirham)," according to market experts.