Falling rupee fuels inflation but makes exports competitive: experts

The depreciation of the rupee has impacted the current account deficit and fueled inflationary pressures, but at the same time it has made Indian exports more competitive, according to experts.

The Indian rupee has been depreciating against the US dollar and is approaching the psychologically key 80 mark, making imports more expensive.

“The depreciation of the rupee has multiple impacts on the economy. Since we have a negative trade balance, although a depreciation of the rupee makes our exports more competitive, our import bills increase significantly.

“It has an impact on the current account deficit, which puts even more pressure on the rupee and import inflation as the price of imports in rupee terms is higher,” said Ranen Banerjee, head of PwC India economic advisory services.

A recent Finance Ministry report warned that India’s current account deficit (CAD) is expected to deteriorate in the current fiscal year due to more expensive imports and tepid merchandise exports.

Mainly driven by a rise in the trade deficit, the CAD stood at 1.2 percent of GDP in 2021-22.

Rumki Majumdar, Economist, Deloitte India, said the US dollar has strengthened amid economic uncertainties marked by rising global inflation and commodity prices, rapid monetary policy tightening in advanced nations, the increased geopolitical tensions, fears of a global economic slowdown and even a possible recession. in the US and some major European nations.

However, currency depreciation does not always hurt the economy, he added.

“The opportunity to boost service export revenues on the back of the wave of global digitization is promising. A weaker national currency is also an opportunity for FPIs to enter the stock market for good medium to long-term returns.” term,” he opined.

Foreign portfolio investors (FPIs) were net sellers in the Indian stock market for the ninth consecutive month in June, with an outflow of Rs 49,469 crore, the highest since March 2020. The sell-off has continued this month, with outflows net to the sum of Rs 7,432 crore during July 1-15.

Overall, FPIs have withdrawn Rs 1.2 lakh crore from the Indian stock market in 2022-23 so far, but the liquidation has been absorbed by domestic institutional investors (DIIs).

Aditi Nayar, Chief Economist at ICRA Limited, opined that a weaker rupee will partly offset the drop in commodity prices, reducing the decline in both WPI and CPI inflation expected in the coming months. .

“Similarly, the beneficial impact of falling input costs on corporate margins will be moderated. The weaker INR will help protect some export competitiveness, given the steeper decline recorded by many market currencies. Emerging Markets (EM) than the INR in the recent period. ,” she added.

Khalid Khan, deputy chairman of export body FIEO, said that while a depreciated rupee will help exporters, the export of goods that have import content in terms of raw materials will not benefit as much.

An article in its recent newsletter said that amid a hostile international environment, continued close monitoring of the widening trade deficit and portfolio outflows is warranted, despite robust reserves.

According to the latest data, the country’s imports expanded by 57.55% to USD 66.31 billion in June compared to the same month a year earlier.

The merchandise trade deficit in June 2022 was estimated at USD 26.18 billion compared to USD 9.6 billion in June 2021, representing an increase of 172.72%.

Crude oil imports in June nearly doubled to $21.3 billion.

Coal and coke imports more than doubled to $6.76 billion in the month from $1.88 billion in June 2021.

It is widely expected that the Reserve Bank of India (RBI) may opt for the third consecutive increase in the key interest rate next month, as retail inflation continues above 7 percent, above its limit upper tolerance of 6 percent.

Banerjee further said that the matching rate increases by the RBI in response to the actions of the US Federal Reserve will also lend support to the rupee.

These counterbalancing forces have helped the rupee in recent months in that it has not depreciated to the extent of other emerging market currencies, he added.

(Only the headline and image in this report may have been modified by Business Standard staff; all other content is auto-generated from a syndicated source.)

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