The battered rupee, which slipped towards the 59-mark, sank to an all-time low against the dollar this week. While the policymakers pressed the alarm bell and attempted to play down the weakness simultaneously, the greenback continued to grow strong in the emerging markets.
The finance ministry officials are parroting the same lines that gold imports are likely to taper off and current account deficit is set to decrease, but the experts are genuinely worried that local currency is crossing into territories where it is undervalued.
Analysts are a worried lot as a weak currency might further dent India ’s trade deficit. A weak rupee will weigh on the import bill increasing the trade deficit. The currency’s depreciation will also add to the current account deficit _ a two per cent fall in real effective exchange rate (REER) will add to the fiscal deficit by making oil imports costlier.
Another concern about the tailspin of rupee is it will aggravate inflation because it offsets the benefits of lower commodity prices. In the case of products such as fuel, a falling rupee is straightaway translated into an increase in the retail prices. In case of other products, the depreciating currency will increase the price of imported raw materials. That impact on consumer prices will be seen when the companies pass on the costs. A ten per cent depreciation in the currency could cause a 1-2 per cent increase in inflation, experts add.
A falling rupee, point out experts, is like a chain reaction where one step automatically leads to the second reaction. Therefore, if inflation comes under pressure, rate cuts will be delayed because as the RBI mentioned in its annual monetary policy on May 3, 2013, there was “little space for further easing.”
Foreign capital inflows are also at risk when the local currency weakens. Stock markets analysts say that already, portfolio flows into both debt and equity have been gradually decreasing, with investors concerned that the local currency may depreciate further. The foreign institutional investors (FIIs) are not finding India to be a very attractive market now.
Struggling with the scarcity of coal, power firms are dependent on imports of the fuel to keep their plants running. A depreciating rupee is set to eat into the margins by raising fuel costs or by making the economics of running the plant on imported coal a loss-making venture. In this period before elections, not all power producers may be able to pass on this increased cost to consumers.
So, can somebody please tell us where we are headingIJ Not just the currency but the nation as a whole.