Rupee downhill course can only be slightly stemmed in the short run

The Indian rupee’s value declining to Rs 80 vis-à-vis the US dollar in the cash market for the first time is sentimentally as well as financially disturbing – except to non-resident Indians, as the dollar depletion from their offshore accounts is that much less. There is also despondency among parents whose children are studying abroad – the INR outgo towards tuition fees in foreign universities and living expenses is going to climb.

Since India has a current account deficit, unlike China which enjoys a huge current account surplus, the decline is indeed worrisome, especially with experts hinting at worse-yet-to- come scenario and dark clouds still hovering over the Ukraine-Russia situation.

The INR weakness has to do with India’s import-dependency for crude – 80% is the import content. The rupee trade with Russia is helping a wee bit but the Indian Oil Corporation has to first buy dollars and then buy crude for imports from the Gulf nations, unlike Reliance which enjoys the luxury of paying for its crude with the proceeds of dollar revenue from exports. In months to come, the dollar dependency would be broken a wee bit as the nation embraces rupee trade more comprehensively, transcending Russia, resulting in a saving of about US$ 20 billion.

But, in the short run, India has to reckon with surging demand for the greenback, both for imports and repayment of the maturing External Commercial Borrowings (ECB), 40% of which is reportedly unhedged. The consequences of unhedged ECB can be easily understood. Year 1 you borrow $ 500 million when the exchange rate was Rs 70 a dollar. You got Rs 35,000 million credited to your bank account. Year 2, it's payback time. You have to find Rs 40,000 million to pay back the same amount. You have lost on the swings what you won on the roundabouts (saving in interest). Yet the RBI is hell bent on giving a leg up to this ruinous course, just to shore up our forex reserves even as our government cosies up to Foreign Portfolio Investments (FPI) despite the warning signals – it is a fair-weather friend. The massive withdrawal of Rs 46,000 crore by FPI in June 2022 was the tipping point and heralded the beginning of trouble ahead.

Long-term solutions are laying emphasis on FDI that is permanent and non-repayable, and on exports, but they are by no means easy, besides being a long haul. We are paying a price for our laidback approach on these counts. So, the RBI has had to come up with knee-jerk firefighting responses like liberalising ECB and making NRI deposits more attractive. If push comes to shove in days to come, it may even ban import of non-essentials like gold. Armed with US$ 600 billion, the RBI briefly carried out sterilisation operations by releasing dollars into the system, but it has had no visible impact in shoring up the INR. The US dollar is indeed riding high and has worsted the British Pound, Euro and Japanese Yen. It is perceived as the safe-haven asset. The dollar rush internationally spells more trouble and dilution for the INR. The world is paying a price for placing the greenback on a pedestal.

Published on: Tuesday, July 19, 2022, 11:42 PM IST