However, the financial climate has changed drastically over the past two months. The incredible fall in oil prices, with the December Crude Oil Contract on MCX going from Rs. 5661 on 1st October to today’s the latest close of 3598, represents a massive 37% fall in terms of Rupees. When you factor in the prices in terms of US Dollars, crude oil prices (USD/barrel) went from $91/barrel to $55/barrel, representing almost a 40% fall in prices.
The result has been a complete collapse of the Russian economy as we know it, with Russia’a main Index- the Russian Trading System Cash Index- having fallen a massive 55% year to date due to Russia’s economy heavily dependent on its oil exports.
However, the main concern with the Rupee is not a domestic one; practically all major currencies have depreciated against the US Dollar. When we look at the Rupee against other currencies, it has not fared that bad. While the Rupee has depreciated 2.68% against the US Dollar over the past 12 months, it has actually appreciated 6.95% against the Euro and remained flat against the Pound. (The Euro, in fact, has depreciated almost 9% against the US Dollar during the same time). This indicates that the US Dollar is simply appreciating against all major currencies in the world.
That being said, India is trying its best to keep the Rupee in a comfortable spot against the Dollar. The RBI has been selling dollars in a massive fashion. By selling dollars, the amount of dollars in circulation increases, causing the dollar’ value to drop. The Reserve Bank is keen on keeping the dollar in a comfortable zone as India imports 2/3 of its oil needs, and while a weaker Rupee helps export driven sectors, it leaves the country vulnerable to currency movement. The latest trade deficit and industrial production figures signaled that growth is being stunted in the country. A rate cut by the RBI will certainly help ease short term concerns.
By Raghu Kumar, Cofounder, RKSV