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Is crude the real culprit for rupee depreciation?

Author: Bharath Sunnam/Wednesday, June 13, 2018/Categories: Currency

Is crude the real culprit for rupee depreciation?

We often see investors pointing at global crude oil and US Treasury yields for causing rupee depreciation. Historical data reveals that the correlation between crude oil and USD-INR is 0.84 for previous 100 trading sessions and 0.93 for last 50 trading sessions.

The correlation often gets reduced as we expand the time frame under consideration. We see a small group of investors pointing out on negative correlation between crude and USD-INR on a large time frame as the five year correlation is -0.76. The reason can be because of the volatility differences and narrow trading range of the currency pair.

Although the correlation is higher in the shorter span, it is the sentiment of foreign investors, economic activity and RBI intervention that would impact the rupee movement.

As India is a second largest crude oil importer in the world, we would see an obvious impact on country’s CAD and inflation which would lead to higher interest rates, increase the borrowing cost for Indian corporates. According to data available, a $10 increase in crude oil prices would diminish the country’s GDP by 0.2 per cent to 0.3 per cent and increase the WPI by 1.7 per cent.

The author is a Fundamental Research Analyst at Karvy Forex and Currencies Pvt Ltd 

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