SLIP AND FALL
by Lola Nayar
AN unsteady rupee together with continuing volatility in crude oil prices in the wake of US sanctions against Iran and Russia have become a major cause of worry for India . The downward slide of the rupee over the last several weeks was triggered by the US Treasury Dep artment ’ s move on April 16 when it put India — for the first time — on a list of countries being monitored for possible currency manipulation . In addition , US President Donald Trump ’ s protectionist moves have not helped India . The country is yet to work out how to minimise the impact on consumers as crude oil prices hover over $ 75 per barrel and the rupee sliding to more than 67 rupees to the dollar . For India , which depends on imports for over 75 per cent of its crude oil dem and , a weak rupee is a big drawback as it threatens to undo the last quarter ’ s robust economic growth . A major concern for policymakers is , will global oil prices scale over $ 80 per barrel in the near future , as witnessed recently before the slide to $ 75 levels ? With the Reserve Bank of India ( RBI ) stepping in , the rupee slide has been stemmed for now at below Rs 68 / dollar . Despite this , the question — worrying importers in particular — is whether the rupee will fall further . “ We look for a range of Rs 66.50 – Rs 69.50 for the next three months , with a weakening bias for rupees . Further on , the rupee ’ s movement will depend a lot on the crude oil price ,” says Vikram Mur arka , chief currency strateg ist , Kshitij Con sultancy Services . He clarifies that contrary to popular perception , crude oil strength or weakness doesn ’ t translate to long-term rupee weakness or strength .
But in the short term , crude strength can sometimes lead to rupee weakness .“ Going forward , if Brent crude continues to rise , it can cause global inflation to rise . This can lead to an increase in bond yields , and as bonds become attractive , funds could be diverted away from global equities which could then fall . This could weaken the rupee further . The link between global equities and the rupee is through the BSE Sensex and the Nifty ,” says Murarka .
With GDP having clocked 7.7 per cent growth in the January – March quarter , up from seven per cent in the previous quarter , the current situation seems likely to hit the manufacturing sector , which had
Slide Down An Oil Slick
A falling rupee and unstable oil prices may threaten recent robust growth , hitting trade in particular
just begun to recoup after demonetisation and GST introduction . The unfolding scenario seems likely to reverse the inflation trend , which had moderated , as well as the modest rise in forex reserves . Shashanka Bhide , director , Madras Institute of Development Studies , points out that pressure on external fronts has been visible since the beginning of the current financial year . He says the rising
Illustration by SAJITH KUMAR
import bill , caused by increasing global prices of energy and other commodities , would have an inflationary impact and hurt exports . “ In other words , the output growth stimulus from the exc hange rate depreciation may be missing . The offsetting factors for growth , in the face of these adverse external conditions , would be how to sustain investment , an indicator of future growth ,” says Bhide .
20 OUTLOOK 18 June 2018