The curious case of the falling rupee

The current fiscal has seen Brent Crude oil touch $80 to the barrel and the rupee crossing 70 per dollar — events that have left our economy rattled. Brent Crude oil prices have since cooled off somewhat from their mid-May highs and are now trading at around $70.

The FIIs have been net sellers in stock markets in all the four months till June this fiscal and only in July were they net buyers -– albeit marginally. Rupee has been the worst performing currency in Asia and has fallen nearly 10% against the greenback this year.

In all the hysteria and chaos whipped up by political parties and analysts alike, what has stood out is the stance taken by RBI, which has not intervened to prop up the falling rupee.

Officials have said that India’s oil import bill could jump by $26 billion if the rupee were to stay at 70 per dollar. Forex reserves from a high of $424 billion have fallen by $20 billion. It’s too early to press the panic button as our forex reserves are adequate to cover 10 months of imports.

The point is that rupee has fallen along with other currencies and so the situation is not that bad. While the rupee dollar exchange rate is a function of demand for and supply of dollars, the depreciation in the rupee itself will benefit and encourage exports.

However, the moot point is whether the fall in the value of rupee can make our exports competitive and sustainable in the long term.

Export outlook

Data released by the Ministry of Commerce reveals that imports in April-July were $171.20 billion as against $146.26 billion in the year-ago period — up 17.05%. Out of the total imports, oil imports cost $46.98 billion — 51.45% higher in dollar terms compared to $31.02 billion in the year-ago period — mainly on account of global Brent Crude price, which has risen 53% in the last 12 months.

As per commerce ministry data, if rupee stays at 70 for the rest of the year, the total oil imports could be $114 billion – up $26 billion over last year. Incidentally, the total oil import bill during 2012-13 was $144 billion. The crude oil price of the Indian Basket for July has shot up to $73.47 per barrel from an average $56 in FY17-18.

India imports 80% of its oil requirements and oil imports represent 27% of all imports. So, any increase in international crude price, coupled with depreciation of the rupee, is a double whammy for the economy.

There is no point fretting over the increase in crude oil prices as they are beyond our control and depend not only on demand but also on supply, which depends on geopolitical factors.

Officials say that due to the fall in rupee, the Current Account Deficit (CAD) could go up to 2.8% of GDP for FY19, compared to 1.9% in FY18 due to the widening trade deficit. While FDI inflows in 2017-18 have moderated to $30.3 billion from $35.6 billion in 2016-17, FII net inflows went up three-fold to $22.1 billion from $7.6 billion during the same period.

However, the situation in FY19 has been completely different as FIIs have been net sellers, both in equity and debt markets, and have pulled out nearly Rs 50,000 crore this fiscal.

Is there a way out?

The reliance on oil imports cannot be wished away in the short run and the import bill will continue to be at the mercy of international crude prices. The FIIs also will come in and go out at their will. This will inevitably cause the rupee to depreciate.

A depreciating rupee might help boost exports in the short run but will not make them competitive. Both these are structural imbalances. How can the government reduce the import of crude oil and increase exports?

One of the measures that the government can take is to beef up its strategic petroleum reserves (SPR). Currently, India’s SPR at Visakhapatnam, Mangaluru and Padur can maintain the country’s petrol supplies for 12 days.

A more sustainable approach for both the economy as well as the environment is to develop alternative and renewable sources of energy like wind, solar and bio-fuels with more focus and rigour.

Being one of the sunshine countries located in the tropics, India’s future in solar energy looks promising. Leading the International Solar Alliance, India is targeting an ambitious 227 GW of solar energy by 2022.

The government has been making efforts to correct the structural imbalance by taking a slew of measures like implementing GST, ease of doing business, Make in India, etc.

It is in this context that the Make in India initiative launched in 2014 to make India a global manufacturing hub by encouraging domestic and multinational companies to manufacture their products in the country assumes importance as it will improve FDI inflows.

(The writer is with the Manipal Academy of Banking, Bengaluru)