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The Rupee Paradox

Prashant Jain of HDFC MF is surprised that the Indian rupee has actually depreciated against the dollar despite a sharp fall in crude prices

The Rupee Paradox Crude Oil Prashant Jain

Why is the Indian rupee trading at 62 per dollar when the crude price has fallen below $50? It is a question many people are asking these days. Most of them don't buy the argument that the inherent strength of the dollar is the main factor that is keeping the Indian currency at 62.

Prashant Jain, chief investment officer, HDFC Mutual Fund, also finds fallacy in the argument. He writes in a note that "a $50 fall in oil prices equals a saving of 2.5% of GDP in CAD as against CAD of 1.9%, 1.1% and 1.3% (as % of GDP) in the previous three quarters of CY14 respectively. These savings are so real and so massive, that they have the potential to alter the USD/INR demand supply equation on a sustainable basis." He believes that the indirect impact of strength of USD, if any, should be moderate and temporary in our opinion. That is why he finds it surprising that the INR has actually depreciated by 4% v/s US$ in this period.

Jain offers a possible explanation for this paradox. "The fall in oil price is not only a recent one but a sharp one too. Consequently, the quarterly average prices are falling with a lag. Further, India's oil imports enjoy nearly a six week credit period, which implies that the effective price for India on cash basis will fall sharply in Jan-Mar15 and Apr-Jun15 quarters," he notes.

He wonders whether this would imply that we are going to see current account surplus in the next quarters (January-March and April-June), before signing off saying if the analysis right, we are in for an interesting times for rupee and interest rates.