RBI comes to rupee’s rescue as Iraq burns

Tags: News

Currency at two-month low, Baghdad shuts main refinery

The Reserve Bank of India (RBI) swiftly intervened in the forex market to prop up the currency helping the rupee shave off two days of losing streak. RBI governor Raghuram Rajan sought to calm fears in the market by suggesting that India was better prepared to deal with external shocks. The rupee ended the day’s trade at 60.03 to the dollar, stronger than the previous day’s close of 60.15.

The rupee dipped to its lowest level in two months in early trade on Tuesday as oil companies rushed to buy dollars amidst tensions in Iraq that raised doubts on whether inflation could be tackled in the wake of rising crude oil prices.

RBI intervened in the market after the rupee went down to 60.42 to the dollar, on fears of escalation of the crisis in Iraq that forced the shutdown of the country’s main oil refinery at Baiji north of Baghdad and evacuation of foreign workers.

Reuters quoted an unidentified oil ministry official that the government had asked state-controlled oil refiners to prepare contingency plans to deal with possible supply outages. “We have asked them to be ready with a back-up plan. They should have a contingency plan ready to avoid any supply disruption from Iraq,” Reuters quoted the official.

India, the world’s fourth-largest oil consumer, imports around 4 million barrels per day of crude oil, with Iraq supplying more than half-a-million barrels daily. Brent oil was quoting at $113 per barrel on Tuesday, almost a dollar higher than Monday’s close.

“I think it is a good time to sell dollars. The pressure on the currency will be there for a while if there are geopolitical risks. But overall, the currency (rupee) will remain stabile,” said Jamaal Mecklai currency expert and promoter of Mecklai Financial.

Both state-owned and foreign banks were busy selling the dollars. While the foreign banks were selling on behalf of exporters, the state-owned banks were selling on behalf of RBI, forex dealers in the loop said.

Speaking at a seminar organised by the State Bank of India, Rajan said the country was closely monitoring the Iraq situation. However, despite the prevailing uncertainty, the domestic economy was better placed to deal with extrenal shocks, he said.

“We have sufficient reserves, the current account deficit is low. So, I think one shouldn’t worry too much about the external side at this point,” Rajan said. The rupee fell to an intraday low of 60.55 to the dollar, last touched on April 29, according to data collated by Reuters.

Ananth Narayan, managing director for global markets and co-head wholesale bank for South Asia at Standard Chartered, said, “There will be pressure on the rupee. If the monsoon were poor than expected, inflationary expectations would go up, keeping interest rates high. But, it is a good time to sell dollars.” He said if the Iraq situation were not brought under control, crude oil prices would shoot up.

Reuters reported Iraqi officials had confirmed that the Baiji refinery north of Baghdad had shut down and foreign workers evacuated, although they said government troops still held the vast compound. The refinery has been protected by elite troops, while the nearby town largely fell to ISIL fighters last week. Baiji’s refinery had stayed open despite years of civil war while US forces were in the country.

Oil ministry officials in New Delhi said they were considering importing additional volumes from current suppliers and buying from the spot market. “We are not unduly perturbed at this point. As of now we don’t see much of a problem... if need be we will look at alternatives, as we have contracts with Saudi Arabia and ADNOC,” an official at Hindustan Petroleum told Reuters.

HPCL plans to buy 105,000 barrels per day (bpd) of Iraqi oil in 2014 compared with about 100,000 bpd last year. The country’s biggest refiner, Indian Oil Corporation which is also Iraq’s biggest oil client from India, has an annual deal to buy 284,000 bpd Iraqi oil in 2014 compared with 270,000 bpd in 2013.

Oil futures fell towards $112 per barrel on Tuesday, pressured by signs of a thaw in relations between Iran and the west, although market players saw scope for gains if violence in Iraq threatened production from OPEC’s second-biggest producer.

“(The rally) has paused rather than come to an end and it will go substantially higher if there’s any threat to the south (where the majority of oil production is centred),” Christopher Bellow at Jefferies Bache told Reuters.


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