Indian currency managed a sharp recovery against Dollar as it had gained 220 paise to 70.69 in just 7 days

My Times Today. when the rupee crossed Rs 73 against the dollar, it was widely expected that it would go past 74 and then 75. Some of the experts spoke of Rs 80/$, while the traditionalist still stuck to 69-70 as a fair value. Now that the rupee has started retreating from the lows, it has come back past Rs 73/$, and then Rs 72/$ and Rs 71/$. Getting back to the sixties does not look odd as everything has changed, not just in India but globally.

Let us see what has happened since 4 November which was the turning point for us as it was the critical date when the sanctions on Iran would be fully implemented. This meant that India and other countries which drew oil from Iran would have to look elsewhere as the embargo set in. It also would have meant two things. The overall supply of oil to the global economy would come down as Iran supplied something like 4 million barrels a day. Second, the price at which we got oil from Iran tended to be lower which meant there would be an additional cost now.

With the ban not being invoked in general, oversupply has increased and with US shale production also increasing, oversupply rules the market. To the extent that the oil-producing nations are now talking of actually cutting back output to steady prices as Brent has come down from a high of $86 to less than $65 in a month’s time. A decision will be taken on 6 December.

As oil prices came down, the rupee strengthened. The other two external factors highlighted were:  Federal Reserve increasing interest rates and the trade war between USA and China which is still on, have not evidently had much influence on the rupee relative to the oil factor. In fact, most of the global currencies have taken a U-turn against the dollar and started moving upwards.

First, the oil producers are now at the receiving end. Oil is a zero-sum game. If consumers gain, producers lose, and vice versa. With prices now looking at even $60/barrel (WTI is already lower), there is a lot at stake and the OPEC will invoke output cuts again to keep the price steady. Clarity will emerge in December when a decision is taken.

Second, the relaxation of sanctions for specific countries including India the US is for 6 months which means that the same issues will come to the fore as we approach April. Therefore, the story is far from over and there will be volatility. However, one can be quite confident that oil will not go beyond 70 and the rupee too will be in the 69-71 range to begin with.

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