Cheaper, Gold, Oil May Give Indian Rupee a Boost


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As prices for gold, oil and other global commodities decline, India may emerge as a key beneficiary, giving the country's central bank room to make additional cuts to short-term interest rates, according to CME Group Chief Economist Blu Putnam.

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Cheaper, Gold, Oil May Give Indian Rupee a Boost

  1. 1. 1 MARKET INSIGHTSIndian Rupee’s Risk CalculusImpacted by Gold’s DeclinensightsMarketGlobal commodity price pressures are dialing down.Signs include a sharp drop in gold prices in mid-April,moderation in food inflation, and range trading inenergy prices influenced by the downward pull on globalenergy costs from swelling North American supplies ofcrude oil and natural gas. India may be one of the keybeneficiaries of this shift. Its inflation rate looks setto move lower, which in turn may give India room forfurther short-term interest rate reductions.The Reserve Bank of India (RBI) made a small quarter-percent rate cut in late April, but the RBI is still worriedabout inflation. India’s inflation rate had peaked above15% after the 2008 financial crisis and declined withthe global recession. Then, in the last several years,India has seen its inflation move back upward. Withthe pressure from global commodity prices removed,our perspective is that India’s inflation rate looks setto move lower. A lower inflation rate may give the RBIthe room to reduce its short-term rates in severalstages over the rest of 2013. Moreover, interest ratereductions sometimes can weaken a currency, but giventhe likelihood of lower inflation and the relatively benignoverall global commodity context, this time could bedifferent for the rupee.On the global front, one key is Japan. With the Bankof Japan (BoJ) massively expanding its balance sheet,including buying equities, the BoJ is sending a clearsignal to Japanese investors to be wary of its own bondmarket and potentially to look abroad for portfoliodiversification. Even with a rate cut or two, India willoffer some very attractive interest rate differentialsrelative to Japan (and the U.S. and Europe), if one cancome to terms with the currency risk. The reducedinflation risk may be the tipping point for Japaneseand global investors to reconsider the Indian rupee.Another key for the Indian rupee is trade flows.The more capital controls a country imposes, themore important is the trade balance to currency moves.When capital flows freely, capital flows easily dominatetrade flows in terms of the dynamics of currencymarkets. India, however, has relatively steep regulatoryand bureaucratic barriers to foreign investment aswell as impediments to the global investments of itsdomestic entities. Consequently, an improvement inthe trade balance could work as an additional factorin encouraging global market participants to considerexposure to the Indian rupee.With India being a major importer of gold for jewelry,the lower prices on gold will contribute a direct influencein terms of lowering the nominal value of imports.Reduced costs for other commodity imports, includingcrude oil, will also offer additional positives. With thetrade balance moving in a positive direction, and capitalMAY 1, 2013BLU PUTNAM, CHIEF ECONOMIST, CME GROUP
  2. 2. MAY 1, 20132 MARKET INSIGHTSflows once again heading toward India, the possibility ofthe Indian rupee appreciating gains further credence.Despite the shift toward a more positive analysis forpotential returns from the Indian rupee relative to theJapanese yen, the U.S. dollar and the euro, marketparticipants probably will continue to assess exposuresto the Indian rupee with a comparatively high riskweighting. In the past, unexpected government andcourt decisions have worked to raise risks of foreigninvestment into India. The trend appears to havereversed but could re-emerge quickly. India’s inflationrate is influenced by international factors, but can alsorespond to domestic forces, especially if problemsdevelop in the agricultural sector. In short, the risk-reward analysis for the Indian rupee has been pushed inthe positive direction by developments in the gold andoil markets, but the significant risks remain.CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile.Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. New York Mercantile Exchange and NYMEX areregistered trademarks of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc.The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions.Although every attempt has been made to ensure the accuracy of the information within this brochure. Additionally, all examples in this brochure are hypotheticalsituations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.Copyright © 2013 CME Group. All rights reserved.All examples in this report are hypothetical interpretations of situations and are used for explanationpurposes only. The views in this report reflect solely those of the authors and not necessarily those ofCME Group or its affiliated institutions. This report and the information herein should not be consideredinvestment advice or the results of actual market experience.Earlier this year, CME Group launched cash-settled Standard and E-micro INR/USD futures as a wayto help traders manage their risks and execute their trading strategies more precisely in this currency.For more details on these contracts and how you can add them to your portfolio visit