Cheaper oil, foreign flows a tailwind for Indian rupee

India's rupee, among Asia's worst performing currencies this year, could be the fastest in the region to rally as the world restarts economic activities after the coronavirus pandemic, oil prices weaken and the US dollar eases broadly, analysts said.

The partially convertible Indian rupee has lost nearly 7% against the dollar so far this year, despite heavy dollar supplying intervention by the central bank. It hit a life low of 76.92 to the dollar on Wednesday.

But a turnaround could be swift because of the collapse in the price of oil, which is a major import for the country, and the return of foreign investment into rupee stocks and bonds.

The crash in oil prices to 18-year lows is in particular a tailwind for the rupee and could even return the country's current account balance to a surplus for the first time in 15 years, economists said.

"Global liquidity glut and prolonged lower global rates is expected to bring back risk-on sooner than the recovery in the real economy. I expect to see a recovery in the rupee in the next month or so," said Upasna Bhardwaj, economist at Kotak Mahindra Bank.

For the second-most populous nation in the world, India has so far seen only a little over 23,000 coronavirus infections and 718 deaths. Reported cases worldwide have crossed 2.6 million. India has had a nation-wide lockdown for more than a month.

"The only challenge for the rupee is if the health situation worsens," said Sameer Narang, chief economist at Bank of Baroda, referring to the possibility of a second wave of infections in the country once the lockdown is lifted.

"With oil prices at less than $20 a barrel, we don't have to pay out too many dollars," he added.

But a prolonged drop in oil prices from the virus-induced falloff in demand will not benefit even heavy importers such as India, and will likely lead to more monetary easing from its central bank.

"Asian currencies generally fare poorly in a weak growth environment, hence its strong correlation to oil prices. We expect low oil prices to coincide with further downward pressure on the region's currencies," economists at ANZ said in a note.

Some analysts, however, said the high interest rate differential in India was still likely to attract investors.

A Reuters poll of market strategists and analysts in early April predicted the rupee would strengthen to 74.00 per US dollar in a year from its level in early April.

A Reuters positioning poll on Asian currencies in mid-April showed market participants had started marginally trimming their short bets on the rupee.

"The rupee will overall remain a solid currency. We could see the rupee go back to 72/dollar (in 12 months) which would be a 10% appreciation," Narang said.

A return of foreign capital via equity and debt flows is also expected to aid the rupee, such as Facebook's plan to spend $5.7 billion to buy a 9.99% stake in Reliance Industries' digital arm.

The Reserve Bank of India's decision to allow foreign investors to buy unlimited amounts of some bonds is also seen boosting dollar inflows seeking India's higher yields.