In September14, when oil was $100 and INR 61, if a poll was conducted about the level of INR should oil fall to $50, an overwhelming majority would have suggested INR at 50-55 in our opinion.
12thJanuary15 : Oil is $50 but INR is 62. Is this a paradox or has something changed ?
On discussing this with economists & experts, one reason cited was the strength of US$.
The fallacy in the US$ strength argument
A $50 fall in oil prices equals a saving of 2.5% of GDP in CAD as against CAD of 1.9%, 1.1% and 1.3% (as % of GDP) in the previous three quarters of CY14 respectively. These savings are so real and so massive, that they have the potential to alter the USD/INR demand supply equation on a sustainable basis. In view of this, the indirect impact of strength of USD, if any, should be moderate and temporary in our opinion.
It is therefore surprising that the INR has actually depreciated by 4% v/s US$ in this period.
A possible explanation
The fall in oil price is not only a recent one but a sharp one too. Consequently, the quarterly average prices are falling with a lag. Further, India's oil imports enjoy nearly a six week credit period, which implies that the effective price for India on cash basis will fall sharply in Jan-Mar15 and Apr-Jun15 quarters.
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