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The rupee fall, which has slipped below the 60/dollar level, could worsen inflation and fiscal deficit concerns, according to a report by Standard Chartered.
The Indian currency has depreciated by about 7 per cent against the US dollar so far in June. It declined by more than 3 per cent since the US Fed announcement of tapering its quantitative easing programme on June 19.
“Our estimates show that a weaker rupee can add to inflationary pressure, widen the fiscal deficit and slow capital inflows, without having a positive effect on the current account deficit. Rapid rupee depreciation also affects business sentiment negatively as uncertainty rises, and worries about a possible financial crisis set in. We see a need to stem currency depreciation, but scope for short-term fixes might be limited,” the report said.
While the Reserve Bank of India has enough reserves to bridge a temporary balance-of-payments mismatch, the focus should be on medium- to long-term measures to improve the current account deficit and encourage stable foreign inflows.
According to the report, an additional oil subsidy burden of 0.15-0.2 per cent of GDP is an inevitable result of a weaker rupee. Every one-rupee depreciation increases oil companies’ losses by Rs 9,000 crore.
The Indian currency has depreciated by about 7 per cent against the US dollar so far in June. It declined by more than 3 per cent since the US Fed announcement of tapering its quantitative easing programme on June 19.
“Our estimates show that a weaker rupee can add to inflationary pressure, widen the fiscal deficit and slow capital inflows, without having a positive effect on the current account deficit. Rapid rupee depreciation also affects business sentiment negatively as uncertainty rises, and worries about a possible financial crisis set in. We see a need to stem currency depreciation, but scope for short-term fixes might be limited,” the report said.
While the Reserve Bank of India has enough reserves to bridge a temporary balance-of-payments mismatch, the focus should be on medium- to long-term measures to improve the current account deficit and encourage stable foreign inflows.
According to the report, an additional oil subsidy burden of 0.15-0.2 per cent of GDP is an inevitable result of a weaker rupee. Every one-rupee depreciation increases oil companies’ losses by Rs 9,000 crore.
Difficult decisions
The Government will either have to reduce other expenditures or raise diesel prices more sharply to contain the fiscal deficit in a weak rupee environment. These are difficult political decisions with elections nearing.
High import intensity of exports, lack of a globally-recognised brand, and similar depreciation in other currencies are likely to limit any positive impact on exports, it said.
beena.parmar@theindu.co.in
Source: thehindubusinessline
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