Commodities

Decline of Indian rupee will make import of oil and other commodities more expensive: Know details

The import of crude oil and other commodities will become more expensive as a result of the Indian rupee’s decline to a historic low of 81.09 to the dollar, adding to the country’s already high inflation rate, which has been above the Reserve Bank’s upper tolerance level of 6% for several months.

 

The increase in the trade deficit and the gradual withdrawal of funds by institutional investors are likely to keep the pressure on the domestic currency, which is primarily caused by the US Fed’s repeated interest rate increases, at a high level.

 

The Reserve Bank, which is scheduled to announce its bi-monthly monetary policy later this week, is expected to increase the repo-rate or the short-term lending rates by 50 basis points in a bid to tame inflationary pressure.

 

For a nation that is 85 percent dependent on imports to meet its oil needs and 50 per cent for gas requirements, a weakening rupee has a bearing on domestic price of fuel.

 

Due to an increase in crude oil imports, India’s trade deficit more than doubled to USD 27.98 billion in August. In August of this year, imports of “petroleum, crude, & products” totaled USD 17.7 billion, an increase of 87.44 percent over the same month last year.

 

The overall reserves for India’s foreign exchange continued to fall, falling by USD 5.219 billion to USD 545.652 billion for the week ended September 16. The reserves fell by USD 2.23 billion to USD 550.87 billion in the previous week, continuing a downward trend as the central bank uses its funds to defend the rupee against pressure primarily brought on by international events.

 

SBI in a report said global commodity prices have remained volatile after their fall in June from historical highs. Prices edged up during late July – early August, before moderating towards the end of the month, largely driven by concerns over demand slowdown.

 

Crude oil prices are trading decisively below USD 100 per barrel with heightened volatility due to expectations of an imminent slowdown in global demand, it said.

 

“A depreciating INR will partly counteract the benefit of lower commodity prices on inflation,” said Aditi Nayar, Chief Economist, ICRA.

 

Solvent Extractors’ Association of India Executive Director B V Mehta said the cost of imported edible oils will go up. The country imports about 13 million tonnes of edible oils every year. “Ultimately, this will be passed on to consumers. However, the only silver lining is India’s oilseed sector exports…The rupee depreciation will boost export realisation and support export,” he said.

 

Imports of vegetable oils stood at USD 1.89 billion in August 2022, up 41.55 per cent over the same month last year.

 

As per the SBI report, no central bank can prevent currency depreciation currently and RBI may allow the rupee to depreciate for a limited period. Foreign currency assets of the RBI have declined by USD 75 billion since the Ukraine War, in order to protect the rupee, it said and added that this has led to reduced import cover of nine months, which is at the lower end.

 

“This is also true that once the currency settles at a lower level, appreciation of the currency picks up at a dramatic pace, that is a distinct possibility given India’s strong fundamentals,” the report said.

 

Moreover, much of the weakness in rupee is on account of a strong dollar and not because of our domestic economic fundamentals, it said.

 

When the RBI’s Monetary Policy Committee (MPC) meets the following week to discuss monetary policy, it will have a special topic to discuss, according to Madan Sabnavis, Chief Economist, Bank of Baroda.

 

The recent downhill movement of the rupee following the Fed’s announcement has made the rupee one of the more unsatisfactory currencies based on the response to the dollar strengthening in the global market, he said.

 

“This piece will also be actively discussed in the deliberations, as when deciding on interest rates, the currency part of the story cannot be left out,” he said.

 

Dilip Parmar, Research Analyst, HDFC Securities said Indian rupee marked the biggest weekly decline after April 2021 amid a stronger dollar index and risk-off moods.

 

“There seems to be no turning back for the dollar as it made a fresh two-decade high and in turn pushed the rupee to a record low level,” Parmar added.

 

The 38th meeting of the Monetary Policy Committee, constituted under the Reserve Bank of India Act, will be held on September 28-30.

 

On Friday, the rupee lost 30 paise to the US dollar, reaching a new lifetime low of 81.09, as a result of investors’ risk-off attitude and a strong US dollar abroad.

 

The local currency at the interbank foreign exchange market fell to 81.23 against the US dollar, breaking the 81-mark for the first time ever. At 81.09, it finally shut down.

 

(with inputs from PTI)

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button
SUBSCRIBE TO OUR NEWSLETTER

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.