Rupee Lags On Higher Energy Prices

USD/INR spot is tracking above 77.60 in early trade, the only currency within the region to falter against the USD today.

• Higher energy prices are likely presenting a headwind. The Bloomberg spot commodity energy index is now at fresh highs, see the first chart below. This has coincided with Brent crude pushing back above $117/bbl.
• Whilst India is importing large volumes of oil from Russia, which won't be inline with benchmark spot oil prices, we have seen the correlation between USD/INR and energy prices rising this year.

Fig 1: Global Energy Prices & USD/INR

Source: MNI - Market News/Bloomberg

• This is illustrated more clearly with the second chart, where the rolling 3 month and 6 month correlations between energy prices and USD/INR is plotted.
• The general trajectory for the correlations has been higher. As energy markets have become more supply driven, arguably this has become more of a headwind for INR. In 2020 and 2021 rising commodity prices tended to also reflect improving global demand conditions, which could have boosted Indian exports and cushioned the INR to a degree.
• Renewed strength in energy prices comes as USD/INR threatens to break higher. Spot has traded a tight range for the past few weeks, with likely RBI intervention capping moves into the 77.70-80 are.
• Earlier, RBI Governor Das stated that the central bank doesn't like run away depreciation pressures for the currency. Hence the RBI is unlikely to be targeting a specific level in USD/INR but rather the rate of change.
• In the current context though, the RBI may wish to avoid fresh USD/INR highs at a time when the broader USD has weakened.
• INR is likely to remain a laggard though compared to the rest of the EM Asia FX bloc.

Fig 2: Correlations Between USD/INR & Energy Prices

Source: MNI - Market News/Bloomberg