Supporting the rupee
How are the Indian and global economic environments affecting the financial markets?
The Indian rupee continues to weaken in reaction to any news of the rising oil price and increase in other imports. The Reserve Bank of India (RBI), since April 2018, has intervened in the foreign exchange markets to the tune of about USD 25 billion to support the rupee but the currency has continued to fall. The government, taking advantage of higher import prices due to the weak rupee, is considering import curbs and levies on steel imports to encourage import substitution through its Make in India initiative. Higher interest rates – to stem any further rise in the current account deficit (CAD) and the fall of the rupee – to stabilize the currency are under consideration. The money markets are pricing in two 25 basis point hikes by the RBI in the repo rate before the end of the year. Indian equity markets have fallen during the week in reaction to the oil price and the rupee and the news of further tariffs by the US on Chinese exports to the US and China’s retaliation. The US-China trade war continues to escalate even as the US negotiates with other countries, including India, with which it has trade grievances.
What to expect from the markets next week?
Indian equity markets will continue to remain sensitive to oil price and the rupee. The news that Saudi Arabia, the biggest member of the Organization of the Petroleum Exporting Countries (OPEC), has indicated its preference for Brent crude price above USD 80/barrel is benefiting energy stocks but is pressuring the currencies of oil importing countries such as India by putting pressure on the CAD and foreign exchange reserves. External macro pressures are expected not only to contain the rise in stocks but also pressure them down. Though India, with its strong growth rate, is attractive to foreign investors, rising US interest rates and domestic macro concerns are putting a damper on Foreign Portfolio Investment (FPI) and hence on dollar reserves. Oil and trade concerns in an otherwise sound Indian economy could whipsaw stocks. Oil price may continue to move in a range-bound manner between USD 65-80/barrel, falling due to the trade war and global growth concerns but could rise somewhat due to the build up to the reimposition of sanctions on Iran by the US in November. It is yet to be seen if, after November, oil price will rise above USD 80/barrel. Other commodity markets will move based on, among other factors, how the Chinese economy and the rest of the world economy is reacting to the trade war and concerns about global growth. There are as yet no worrisome triggers to drive the markets down by a large extent. However, the developing situation between US and Iran merits watching carefully because it has the potential to disrupt world oil supplies due to any actions by Iran in the Strait of Hormuz which could push oil prices higher.