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CAD worries due to rising crude add to rupee’s woes

MUMBAI: The looming spectre of a widening current account gap, exacerbated by the galloping crude oil prices, sent the Indian rupee to a new low Wednesday, with the unit slumping below 73 to a dollar for the first time and dimming further the appeal of local assets for overseas investors.

A seemingly unhindered northward run for oil prices has coincided with a cycle of hardening interest rates in the US, the global economic powerhouse where growth has made dollar-denominated securities more attractive than emerging-market investments. The flight of capital from emerging markets has caused their currencies to depreciate, and with a 13 per cent decline this year, the rupee has performed the worst in Asia.

“Global macros, including oil, have continued to put pressure on the rupee,” said Ashish Vaidya, head of trading at DBS Bank in Mumbai. “The markets were seen to push the rupee to the brink today, with major news flows coming from the ministry and the regulatory sources earlier in the day.”

The rupee fell as crude oil price surged as high as $85 per barrel, the highest level since November, 2014. The rupee hit a record low at 73.42 a dollar. The local unit ended 0.70 per cent down at 73.34, the life-time closing low for the currency.

In Mumbai, speculation was rife that the authorities could open up a special dollar window for oil marketing companies. India meets over three-fourths of its oil requirements through overseas shipments.

Also, some market participants believed that the RBI was comfortable with the rupee’s current levels as it was not seen intensely intervening in the market.

“In addition to global macros, the direction of the rupee will be a subset of the RBI policy action and associated statements,” Vaidya said.

Later in the evening, RBI eased external commercial borrowing norms for oil marketing companies by cutting the minimum average period of 3/5 years from five years earlier. The central bank has waived off the individual limit of $750 million. The RBI has permitted oil marketing companies to borrow as much as $10 billion through External Commercial Borrowings.

Overseas derivatives, or nondeliverable forwards, pointed to the record low rupee level on Tuesday, when New Delhi observed a trading holiday. The notional NDF spot rate hit 73.40.

“The overseas currency market has weighed on the rupee, which is extending its losses with record low levels,” said Anindya Banerjee, currency analyst at Kotak Securities. “Although the RBI was believed to have intervened, the dollar demand is coming from speculators, who are now frequently changing positions. Globally, people are going long on the dollar.”

The arbitrage or differential between onshore and offshore forwards markets has added to the pressure. The gap has on Wednesday widened to 14-25 paise in the one – and two-month maturity categories compared with eight to 20 paise last week.

“As long as oil is rising, it will continue to cloud the prospects of importing emerging market currencies, including the rupee,”said a treasury head of a large foreign bank.

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