RBI may let rupee fall further to make exports competitive
- RBI might allow further declines in Asia's worst-performing currency.
- A weaker rupee would boost export competitiveness and help bridge gaps likely widened by leaping oil prices.
Current Position of Rupee
- Since February 21, the rupee has lost 2.17% to the dollar(at 76.17).
- Reserve Bank of India (RBI) likely deploying its record forex pile to cushion the shock.
- A declining rupee helps enhance India's export competitiveness.
- Higher oil prices could accentuate the impact of imported inflation if the currency were to slide further.
Trade deficit and Inflation factor
- India's trade deficit has been high (about $20 billion a month for the past six months) on a broad-based import surge.
- Union budget estimate FY23 CAD (current account deficit) at 2.8% of GDP at $90/barrel average crude, present crude price is way higher which will impact it.
- Retail fuel prices in India have remained unchanged even while global crude prices surged past 3-digit marks for the first time in 8 years.
- With the present crude price of US$110/bbl, the govt. will have to raise prices by ₹14-15/ltr (12-15%).
- The impact would be approx 60-80bps on CPI.
Rupee fall in past
- 2001(US Twin Tower attacks): rupee dropped 1.32%.
- Gulf War: the rupee fell 0.39%.
- 1998(nuclear tests): the rupee slid about 6% in a month.
Conclusion
- Such unprecedented volatility due to any geopolitical turmoil has never been witnessed.
- Even during the Pokhran/Kargil event, instability in the markets was much less than what it is today.