Rupee Rally Threatened as Crude Oil Climbs to Two-Year High: India Credit

A surge in crude-oil prices to the highest level in two years is prompting Barclays Plc and Royal Bank of Scotland Group Plc to predict India’s widening current- account deficit will threaten this year’s rally in the rupee.

Oil for January delivery rose to $89.76 a barrel yesterday on the New York Mercantile Exchange, a level not seen since October 2008. Crude oil imports by Asia’s second fastest-growing major economy surged 41 percent in the first 10 months of this year to $82.1 billion, according to data compiled by Bloomberg.

“Whenever oil prices go up, the risk of the current- account deficit widening increases quite significantly,” Rahul Bajoria, a Singapore-based economist at Barclays, said in an interview on Dec. 3. “We expect the rupee to continue underperforming as the shortfall is pretty much the main point and oil prices are definitely a risk.”

The rupee tumbled 8 percent in the third quarter of 2008 after crude-oil prices rose to a record $147.27 a barrel on July 11 of that year. The currency is little changed this quarter, underperforming the 3.6 percent gain in Taiwan’s dollar, the 1.1 percent advance in Thailand’s baht and the 0.7 percent appreciation in China’s yuan. Barclays predicts the rupee, which rose 0.4 percent yesterday to 44.94 per dollar, will drop 4.6 percent in the coming three months.

Official data show the gap in India’s current account widened to a record $13.7 billion in the three months ended June. The government plans to cap the shortfall at 3.5 percent of gross domestic product in the current financial year, compared with 2.9 percent last year, Finance Minister Pranab Mukherjee said at a conference on Oct. 26.

IMF Trade View

The International Monetary Fund forecasts the deficit will be 3.1 percent of GDP in 2010, wider than Brazil’s 2.6 percent and compared with surpluses in Russia and China.

India, the world’s fourth-largest consumer of oil, imported about 70 percent of its crude last year, according to the U.S. Energy Department. Of the 10 forecasts updated on Bloomberg since Nov. 1, six estimate that crude oil traded on Nymex will cost $90 a barrel or more by the end of 2011. Prices will increase to $120 a barrel before the end of 2012 as consumption grows in emerging economies, JPMorgan Chase & Co. said in a report on Dec. 3.

“Oil prices are something to worry about,” Sanjay Mathur, the Singapore-based chief Asia emerging-markets economist at Royal Bank of Scotland, said in an interview yesterday. “And the current account obviously matters now as it is not at a level where it can be wished away.” The gap is “perilously close” to widening to 4 percent of GDP, he said.

Yields Climb

The yield on India’s bonds increased this quarter as official data show the nation imported $8.4 billion worth of oil in October, the most since May. The rate on the 7.8 percent notes maturing in May 2020 has climbed 36 basis points, headed for the worst quarter this year, to 8.21 percent. A basis point is 0.01 percent.

India’s three-year bond yield rose four basis points this month to 7.40 percent, while the rate on similar-maturity notes in Brazil were little changed at 12.35 percent. The yield on comparable Chinese notes fell four basis points to 3.08 percent and that in Russia slid 15 basis points to 6.96 percent. The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries was 521 basis points. The measure has averaged 317 basis points during the past decade.

India’s bonds have returned 3.8 percent this year, the fourth-worst performance among 10 local-currency debt markets tracked by HSBC Holdings Plc, as average inflation in the first 10 months was almost twice the central bank’s targeted rate of 5.5 percent. By contrast, investors in Indonesia’s debt assets earned 22 percent, the most in the region, according to Europe’s largest bank.

State Bank Debt

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has increased 57 basis points this year to 174.68, according to the data provider CMA.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should the bank fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“Oil prices are a very important variable in a number of different respects for the Indian economy, none of which are favorable,” Robert Prior-Wandesforde, Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG, said in an interview on Dec. 3. “With high prices comes a deteriorating trade position and also some negative implications for inflation and growth.”

He forecasts the benchmark wholesale-price index will average 8.5 percent this fiscal year.

Indian Shares

The rupee has appreciated 3.5 percent this year as overseas investors poured a record $29.7 billion into Indian shares to benefit from the nation’s economic growth, according to data published by the Securities & Exchange Board of India.

Shipping Corp. of India Ltd., the country’s biggest sea carrier, drew 55.2 billion rupees ($1.2 billion) of bids in a share sale that closed on Dec. 3. A sale by MOIL Ltd., India’s largest producer of manganese ore, closed on Dec. 1, with bids for 56 times the 33.6 million shares offered, according to the National Stock Exchange.

“We expect the rupee to soften at some point next year, because of the impact of oil prices,” Sebastien Barbe, Paris- based head of emerging-market research at Credit Agricole SA, said in an interview yesterday. “But we are bullish on the rupee in the short term as global liquidity may remain supportive of inflows.”

Barbe forecasts the rupee will depreciate to 45.50 per dollar by the end of 2011.