The Indian Rupee’s fall to an all-time low of 81.09 to the dollar will make importing crude oil and other raw materials expensive, further fueling inflation which for the past few months has remained above the Reserve Bank’s 6% upper tolerance level.
The pressure on the domestic currency, mainly due to repeated hikes in interest rates by the US Fed, should continue with the increase in the trade deficit and the gradual withdrawal of funds from institutional investors.
The Reserve Bank, which is due to announce its bi-weekly monetary policy later this week, is expected to raise the repo rate or short-term lending rates by 50 basis points in a bid to rein in inflationary pressure.
For a country that depends 85% on imports to meet its oil needs and 50% for its gas needs, a weakening of the rupee affects the domestic price of fuel.
India’s trade deficit more than doubled to $27.98 billion in August due to increased crude oil imports. Imports of “petroleum, crude and products” amounted to $17.7 billion in August this year, an annual increase of 87.44%.
India’s forex pool continued its southerly journey, with overall reserves declining by $5.219 billion to $545.652 billion for the week ended September 16. Reserves, which fell as the central bank rolled out the kitty to defend the rupiah amid pressure caused mainly by developments, had fallen by $2.23 billion to $550.87 billion the previous week.
In a report, the SBI said global commodity prices remained volatile after falling in June from all-time highs. Prices rose slightly in late July-early August, before moderating towards the end of the month, mainly on concerns about slowing demand.
Crude oil prices are trading well below $100 a barrel with heightened volatility on expectations of an impending slowdown in global demand, he said.
“A depreciation of the INR will partly offset the benefits of lower commodity prices on inflation,” said Aditi Nayar, Chief Economist, ICRA.
The executive director of the Solvent Extractors Association of India, BV Mehta, said the cost of imported edible oils would rise. The country imports about 13 million tons of edible oils every year. “Ultimately, this will trickle down to consumers. However, the only bright side is India’s oilseed sector exports…Rupee depreciation will boost export realization and support exports “, did he declare.
Vegetable oil imports amounted to USD 1.89 billion in August 2022, up 41.55% from the same month last year.
According to the SBI report, no central bank can prevent the currency from depreciating currently and the RBI can allow the rupee to depreciate for a limited period. The RBI’s foreign currency holdings have shrunk by $75 billion since the war in Ukraine, in order to protect the rupee, he said and added that this has led to a reduction in import cover of nine month, which is at the lower end.
“It is also true that once the currency stabilizes at a lower level, currency appreciation accelerates at a dramatic pace, this is a distinct possibility given India’s strong fundamentals. “, says the report.
Moreover, much of the rupiah’s weakness is due to a strong dollar and not our domestic economic fundamentals, he said.
Madan Sabnavis, Chief Economist, Bank of Baroda was of the view that the RBI’s Monetary Policy Committee (MPC) will have a unique issue to discuss when it meets next week for monetary policy.
The recent downward movement of the rupiah following the Fed announcement has made the rupiah one of the most unsatisfactory currencies based on the response to the strengthening dollar in the global market, he said. .
“This coin will also be actively discussed in the deliberations, because when deciding on interest rates, the monetary part of the story cannot be left out,” he said.
Dilip Parmar, Research Analyst, HDFC Securities, said the Indian rupee marked the biggest weekly decline after April 2021 amid a stronger dollar index and risky mood.
“There seems to be no turning back for the dollar as it hit a new two-decade high and in turn pushed the rupiah to an all-time high,” Parmar added.
The 38th meeting of the Monetary Policy Committee, constituted under the Reserve Bank of India Act, will be held from September 28-30.
The rupee fell 30 paise to close at a new all-time low of 81.09 against the US dollar on Friday, weighed down by a strong US currency overseas and risky sentiment among investors.
In the interbank foreign exchange market, the local currency broke through the 81 mark for the first time and fell to 81.23 against the US currency. It finally closed at 81.09.
