Weak inflows leave rupee exposed as oil prices bite

ING Economics warns weak capital inflows have left the Indian rupee vulnerable while sustained high oil prices push up wholesale inflation. The government has limited increases in retail fuel prices through subsidies, which has shifted some of the adjustment onto the currency and upstream prices.

Deepali Bhargava, ING’s Asia‑Pacific chief economist, told clients in the bank’s latest research that the rupee’s slide reflects portfolio outflows and muted foreign direct investment rather than an acute current account crisis. Bhargava warned, “Unless those inflows recover, the rupee’s vulnerability is likely to persist.” She also noted the external position is not at crisis levels.

Wholesale price inflation rose to 8.3% year‑on‑year in April, led by roughly 25% gains in fuel and metal prices. Consumer inflation increased by about 20 basis points in the same period, reflecting the limited pass‑through of global oil costs to retail fuel. Gasoline prices rose about 8% in May.

Foreign institutional investors have continued to withdraw funds and India’s equity market premium over other emerging markets has narrowed. Net FDI inflows remain subdued. ING projects the current account deficit could widen to 2.1% of GDP by 2026 and forecasts USD/INR at about 95.50 at year‑end.

Some demand indicators remain strong: electronics imports rose 38% year‑on‑year. Supply issues include a nearly 10% drop in coal output in April and disruptions in chemical supplies, which could affect industrial activity. India’s oil imports as a share of GDP fell from 8.8% in 2013 to about 4.8% last year, helped by a larger services sector and greater coal use in power generation.

The report notes India used Non‑Resident Indian deposit schemes to raise $25 billion in 2013 but says matching that inflow would be more difficult now because of higher global interest rates and different external conditions. ING sees a higher probability of gradual stabilization than of a disorderly weakening and points to Reserve Bank of India foreign‑exchange interventions and a correction in the real effective exchange rate as factors that should limit further depreciation.

The research outlines the tradeoff facing policymakers between containing retail fuel prices through subsidies and supporting the exchange rate while awaiting a recovery in capital inflows.