Thursday, 24 November, 2022
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How rupee affects macroeconomics, domestic competition, and why its fall isn’t all bad news

India’s enormous dependence on oil imports makes the rupee extremely vulnerable. It is currently the worst-performing Asian currency.

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New Delhi: Russia’s invasion of Ukraine has set off dominoes globally, wreaking havoc across economies. India’s economy is no exception. Since the war began, the Indian rupee (INR) has weakened by 3.2 per cent, with the crude prices having risen by about $30 per barrel. 

In the same period, India’s stock market has also fallen significantly — the BSE Sensex is down 4.5 per cent, while the Nifty 50 is down 4.2 per cent.

However, the headline that has attracted attention from all corners is the weakening of the INR, which has emerged as the worst performing Asian currency, followed by the Korean won and Philippine peso, each of which have declined around 1.6 per cent.

On Monday, the currency fell to its lifetime-low against the US dollar, at 77.01. This coincided with the price of India’s crude oil basket rising to $126.36 per barrel, its highest level since July 2008, according to data from the Petroleum Planning and Analysis Cell.

On Wednesday, the rupee closed at 76.56 to a dollar.

The popular perception is that a falling currency is just bad news for an economy. In the Indian context, this isn’t so. There are several pros and cons.

ThePrint explains how the fall in rupee affects the economy, and why it isn’t only bad news.


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Good news — help to exporters, better domestic competition

A weakening rupee benefits a country’s exports as exporters get more value for the same amount of goods that they export in dollars.

Indian industries like software and textiles, where the dependence on imported raw materials is limited, could actually benefit more from the rupee depreciation.

India is likely to exceed its export target of $400 billion for 2021-22. 

The country’s merchandise exports during April-February period stood at $374.05 billion, a jump of 45.80 per cent over $256.55 billion in the year-ago period.

Not just exports, but a weak rupee also raises the competitiveness of the domestic industry. As the value of imports increases, it feeds into the retail prices of the goods and services, and consumers tend to sway towards cheaper domestically produced goods.

“India is a price-sensitive market. Case in point is the market for mobile phones. If the prices of foreign goods increase, people will move to domestically produced goods, increasing the competitiveness of Indian products,” said an economist with a mid-sized brokerage firm, who didn’t wish to be named.

A weaker rupee would also make imports more expensive for Indian consumers, making home-grown products relatively cheaper. This in turn could work in favour of certain domestic companies that face stiff competition from cheaper imports.


Also read: Oil shock risks becoming ‘nightmare’ for RBI, it could raise inflation forecast


Deteriorating fiscal maths

A large portion of the Modi government’s spending goes into providing subsidies to the poor and farmers. One of the major components of subsidies is the fertiliser subsidy, pegged at Rs 1.4 lakh crore for the current financial year and at Rs 1.05 lakh crore for 2022-23.

The domestic fertiliser industry is largely dependent on imports to meet its raw material requirement for both urea as well as finished fertilisers. The government provides a subsidy on urea. So, if the value of urea imports increases, the subsidy burden on the government will rise too.

Speaking in Chennai last month, Finance Minister Nirmala Sitharaman acknowledged that the geopolitical crisis could impact India’s import of essentials such as edible oils and fertilisers.

India’s fiscal deficit — spending higher than income — is pegged at 6.9 per cent of the GDP for 2021-22. It is estimated to fall to 6.4 per cent of the GDP in the next financial year.

Bad news — CAD widens, RBI plans gets hit

The rupee value in the domestic economy plays a critical role in keeping stable most of the major indicators, like current account deficit (CAD), fiscal deficit, inflation, and most of all the gross domestic product, so a fall hits the macroeconomics.

Since India imports almost 80 per cent of its oil needs, a depreciating rupee can bloat the CAD — a trade measurement where a country’s imports of goods and services exceed its exports.

A wider CAD could mean India dipping into its foreign exchange reserves to finance this deficit in the absence of dollar inflows by foreign investors into the country. Experts believe that even if the global crude stabilises around $100 per barrel, India’s current account will go beyond 3 per cent of its GDP.

The Economic Survey 2021-22 had assumed average crude prices at $70-$75 per barrel for its budget maths. It said that India would be able to sustain a CAD of 2.5-3.0 per cent if it’s not struck by external crises.

India’s current account had already slipped into a deficit of $9.6 billion or 1.3 per cent of GDP in the July-September period of 2021-22, according to RBI data.

A large portion of the Modi government’s spending goes into providing subsidies to the poor and farmers. One of the major components of subsidies is the fertiliser subsidy, pegged at Rs 1.4 lakh crore for the current financial year and at Rs 1.05 lakh crore for 2022-23.

The domestic fertiliser industry is largely dependent on imports to meet its raw material requirement for both urea as well as finished fertilisers. The government provides a subsidy on urea. So, if the value of urea imports increases, the subsidy burden on the government will rise too.

Speaking in Chennai last month, Finance Minister Nirmala Sitharaman acknowledged that the geopolitical crisis could impact India’s import of essentials such as edible oils and fertilisers.

India’s fiscal deficit — spending higher than income — is pegged at 6.9 per cent of the GDP for 2021-22. It is estimated to fall to 6.4 per cent of the GDP in the next financial year.

In its monetary policy report in October, the RBI had estimated that a 10 per cent rise in the price of crude oil will add 30 basis points (bps) to domestic headline inflation and shave off 20 bps from the GDP growth.

Clubbed with a weakening rupee, as the price of global crude nears record high, it will feed into the domestic retail inflation through higher prices of petrol and diesel and its linkages with transportation costs of goods and services in the country, thereby increasing the price of goods.

Retail inflation, measured through consumer price index (CPI), has largely remained close to the upper limit of the RBI’s comfort band of 2-6 per cent, and the central bank, if anything, has shied away from acknowledging the risks of inflation. Even at the last policy review on 10 February, the RBI focused more on supporting growth.

According to the RBI’s projections, CPI inflation will decline to 4.5 per cent in 2022-23. In January, it breached RBI’s tolerance band at 6.01 per cent.

(Edited by Amit Upadhyaya)


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