Rising fuel prices & tumbling rupee: Twin challenges before the Indian Government

IMF spokesperson Gerry Rice said, “Indian rupee has lost about 11 percent of its value in nominal terms vis a vis the US dollar”. Fuel prices have also been surging, attributing to rise in global oil prices, decline in Rupee and unsure geopolitical scenario considering Turkish currency turmoil and trade wars.

“The currencies of many of India’s trading partners, including those in the emerging markets, too have depreciated against the dollar…”, said Gerry Rice.

The Rupee slipped further by 1.1 percent after a fresh round of tariffs were announced by US President Donald Trump on the Chinese goods worth $200 billion yesterday.

A weak Rupee will harm importers while import bill spikes, subsequently widen current account deficit (CAD) as international crude prices are rising and India imports around 85% of its oil requirements, and also will be inflationary. The CAD also includes net income, including interest and dividends, and remittances. Fall in Rupee is leaving NRIs losing heavily who have invested in leveraged Indian Rupee deposit products in a whammy. Widening CAD can create macro-economic vulnerability, affecting stability in currency markets.

Arun Jaitley provided assurance that the government will be able to meet the revenue collection targets as well as fiscal deficit target set in the Budget for 2018-19 at 3.3 percent of the GDP. The government has resisted populist route to cut fuel prices. Cutting down excise will hurt tax revenue and government might miss its budgetary goal.

A hurtling economic growth has ensured rise in vehicle ownership and demand for oil resulting in record retail fuel cost. This proves to be a challenge for the government when impending US sanctions on Iran with crisis in Iran, Libya and Venezuela is set to worsen the outlook for crude oil prices. Indian refiners pay in dollars for crude oil, exposing them to the risk of foreign exchange fluctuations.

Government last week announced five measures stabilise rupee and to contain CAD, relaxations in investment limits for foreign portfolio investors in corporate debt market, exemption from withholding tax to companies raising funds through Rupee denominated bonds abroad, indication on curbs on non-essential imports and said measures to boost exports will follow. The measures are on the capital account side where the aim is to infuse more dollars into the economy.

According to RBI, the REER (real effective exchange rate) is based on 36 currency exports and trade-based weights. REER of Rupee for August 2018 stood at 114.54 suggesting that the Rupee is intrinsically overvalued and is depreciating only against the dollar – hence, the panic is uncalled for. Further,  RBI is keeping a keen watch on this.

Market is expecting the government to announce an exclusive window for oil marketing companies to buy dollars from RBI instead of knocking on the doors of banks.

The government can also look at raising funds through issuance of NRI bonds to stabilise the currency and foreign currency non-resident bank deposits to keep deposits in foreign currency to avoid losing due to falling Rupee. It should also be noted that the government measures will gradually show results.

CM Jakhar

A news enthusiast by hobby, CM is the founder of Prediction Junction. He is always passionate to dig into the latest in the world and has a natural way of depicting his analysis and thoughts. His main motive is to bring the true and recent piece on where the world is heading.

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