Falling rupee will burn a hole in our pockets

The rupee has been buffeted by the interconnected nature of the world today. It’s fall by about eight per cent since January this year has nothing to do with domestic issues. It has become a victim to the political and financial turmoil in Turkey, which is in a war of words with the United States. Turkey is 2,876 miles away from India, yet the rupee tripped to '70 to a dollar as the Turkish turmoil reverberated around the globe. The banks have invested heavily in Turkey’s construction boom, that was really a bubble, and there could be huge problems if payments aren’t forthcoming.

This year it has lost 8.6 per cent against the dollar, becoming the worst performer among Asian currencies that include the Singapore dollar, the Thai baht the Indonesian rupiah, the South Korean wan and South Africa’s rand. The rupee, like other currencies, has been affected by the US-China trade war that saw the Chinese yuan weaken against the dollar. This could affect India’s exports as the rupee becomes uncompetitive. Medium and small enterprises, particularly in the pharmaceutical sector, will bear the brunt of this. While the government seems sanguine about the development and feels that the fall is only temporary, the point is that it will burn a hole in the pockets of consumers. Fuel costs are the first to be impacted as India is the third largest importer of petroleum products. Crude oil, natural gas and coal account for $132 billion. India’s imports exceed its exports. India’s oil import bill is likely to now jump by $26 billion to $114 billion. This will take a toll on India’s foreign exchange reserves, which as of August 3 decreased by $21.84 million to $402.70 million due to the foreign portfolio investors withdrawing their investments. They fear that the rising crude prices could affect the stability of the Indian economy. In reality, India is one of the strongest and fastest growing economies.

However, the good news is that the oil ministry is doing everything to increase the production of oil and gas. It has invited bids in this second round from explorers to unlock oil and gas assets to the tune off '1 lakh crore in the Discovered Small Fields. It will take time before oil actually gets off the ground, but at least the process has started.

There are hopes in some quarters that the Reserve Bank of India would intervene to stop the rupee’s slide. The RBI does not have any target for the level of the rupee against the greenback. Besides, it has already raised rates twice back-to-back early this month, and this has had no impact of oil prices. It may be recalled that during an earlier global economic crisis the RBI had issued NRI bonds. If it did so this time around, it would have to issue bonds worth $30-35 billion. But it is unlikely to do so this time. The RBI has yet to comment on the situation, though the RBI governor had commented on the global situation earlier this month whilst announcing the monetary policy.