Likely to drain out liquidity; force RBI to keep interest rates elevated.
Mumbai: The sharp depreciation in the rupee due to the global risk-off environment triggered by the currency crisis in Turkey is likely to slowdown the ongoing growth recovery in the domestic economy.
With oil prices still remaining at elevated levels, the steep fall in the rupee would make imports costlier putting further strain on India’s widening current account deficit (CAD).
“It would be a mistake to see this as only a country-specific phenomenon; there is a larger dynamic at play,” said Edelweiss Financial Services in a note.
According to it, capital flows to emerging markets (EM) could slow down as European banks retrench lending to EMs amidst heightened risk. This will hurt countries with high external debt and current account deficit. Secondly, the strengthening of US dollar could undermine global industrial activity, which could impact exports from emerging markets, a main engine of growth at the moment. “India is much less vulnerable relative to other EMs in terms of external debt and current account deficit. However, if the global situation deteriorates, not only would exports slow down, but domestic liquidity too may dry up as the RBI drains liquidity to support the rupee. This in turn would hurt corporate deleveraging and weigh on recovery,” it said.
While a weakness in rupee is expected to boost exports, Devendra Kumar Pant, chief economist and senior director (public finance) at Ind-Ra said exports respond more to global demand and growth rather than fluctuations in currency. With India being net importer and oil forming a major component of our total import bill, he said the persistent weakness in the rupee would make widen our current account deficit. “If the capital flows are not sufficient enough to fund this deficit, we could possibly see a second round impact of the current crisis in the form of depletion of forex reserves,” Mr Pant said.
Though all these factors could adversely impact domestic growth, he said the resilience of the economy to absorb this shock is much better than what it was during 2013 turmoil.