Indian rupee slides as oil prices rise

The rise in oil prices sends the Indian government scrabbling for investment flows from overseas.
The Indian rupee has depreciated rather alarmingly in the last week, touching Rs 46.4. According to an ABN AMRO Securities (India) report, Indian officials attempted to prevent a further slide by saying that the depreciation of the rupee was a result of the Indian currency finding its "fair value".

Ravi Kumar, chief foreign exchange dealer for ABN AMRO says that the "fair value" of the rupee is around 46.0, with the Indian government "comfortable with levels of 46.5 at this point of time." The Indian government has been pursuing a policy of an undervalued currency in order to boost exports and to attract foreign investment.

The bearish sentiment of the rupee began in April of this year, largely due to the re-classification and lower weighting by ratings agencies and higher US interest rates, which in turn had the effect of lowering foreign investment flows. 

Kumar says that so far this year there has only been about $1 billion of foreign investment into India as of the beginning of September this year. In the years 1997/98 and 1998/99, India attracted some $6 billion-$7 billion in foreign direct investments and foreign institutional investment flows (FII). An estimated $2.5 billion has also been repatriated by foreign investors from the Indian Stock markets, which Kumar says has contributed to the depreciation.

Of possibly bigger effect is the continuing rise of oil prices. India imports some 70% of its oil requirements. Therefore, the hike in prices translates to a hefty bill. "As per government calculations with oil at a mean value of $28 per barrel, the rise in the import bill is $6 billion this year with every additional dollar price increase adding $0.5 billion to the bill," says Kumar.

Will this trend continue? Kumar thinks that the fate of the rupee is largely dependent on the ability of the government to bring in about $10 billion from abroad, largely to cover the oil bill. "If the government is successful," says Kumar, "we think the rupee will stabilize around 46.20/47.0 for the rest of the year. In the event that the flows do not materialize, ABN AMRO securities predict the rupee will slide a further 3% from current levels.

According to Bloomberg, the State Bank of India Ltd may raise as much as $4 billion from non-resident Indian nationals to help pay for the rising cost of oil imports.