Re may rise on forex inflows

Crude oil prices soared over $70 a barrel for the first time in 10 months, but this has not set off alarm bells in the currency market as oil retailers say their activity will still be need based and the rupee could rise on persisting capital inflows.

"Rising capital flows have neutralised demand from oil companies. The market has not yet recognised the trend of the rising oil prices," said N S Paramsivam, chief treasury official of Essar Group.

Prices on the New York Mercantile Exchange topped a 10-month high of $71.49 a barrel because of rising geo-political tensions in Africa and Iran.

The UK Brent crude ended at $72.93 a barrel on Tuesday from $72.72 Monday.

Tuesday, India's crude oil basket breached the $70 a barrel mark to touch the highest level of $70.67, not seen since August. The Indian crude oil basket comprises of Oman-Dubai sour grade crude and Brent dated sweet crude in 58:42 ratio.

But oil companies have not pressed the panic button. In FY07, growth in crude oil imports was lower at 30.4 per cent compared with 47.3 per cent the previous year.

The lower growth in oil imports was attributed to moderation in prices of the Indian basket of international crude.

ABN AMRO Bank has predicted a jump in oil imports by 11.6 per cent to $63.9 billion in 2007-08 compared with $57.3 billion a year ago.

"Inflows from foreign funds are so huge that the impact on oil purchases are not being felt," said R V N Vishweshwar, finance manager-treasury, Indian Oil Corporation.

Tuesday, the Indian unit rose to a one-month high of Rs 40.43 a dollar reflecting strong inflows from foreign institutional investors into the local stocks, which touched record highs.

Between April and June, foreign investors have poured $4.50 billion into Indian equities, sharply higher from the minuscule $0.50 billion in the same period previous year.

A large part of inflows in April-June has been on account of investment in primary market issues.

However, visible effects of rising crude oil prices can be seen on the rupee once portfolio dollar inflows subside and if oil prices remain alleviated, treasurers said.

"After a month or so, when the huge inflows dry up, the effect of oil price rise may start seeping in," said a finance official with a large petrochemical company.

"For the next month or so, the rupee could move in the 4 0.30-41.30 levels," the official added. A rise in crude oil prices to $75-77 in the next six months could hurt the rupee, said Vishweshwar.

Paramsivam also says the rupee could weaken to Rs 41.50 a dollar September onwards. "Over a longer term horizon, fast growing consumption of crude oil and as a result oil imports growing at over 10 per cent annually, would only exacerbate the downward pressure on the rupee from rising oil prices," said ABN AMRO Bank's senior economist Gaurav Kapur in his currency note.

But for now, the rupee is unlikely to be hurt by rising crude prices as strong inflows from portfolio as well as primary market issues continue to outweigh demand for dollars.