Inflation woes worsened by rupee decline

18 Jul 2022 , 10:12 AM

According to experts, rupee depreciation has increased inflationary pressures and the current account deficit while also improving the competitiveness of Indian exports.

Imports have become more expensive as a result of the Indian rupee’s decline against the US dollar, which is closing in on the 80 psychologically significant levels.

“The rupee’s decline has a variety of effects on the economy. Even while a devaluation of the rupee makes our exports more competitive, given that we have a negative trade balance, our import costs rise dramatically.

According to Ranen Banerjee, Leader, Economic Advisory Services, PwC India, “it has an influence on the current account deficit thus further putting pressure on the currency as well as imports inflation too as the price of imports in rupee terms is greater.”

According to a recent study from the finance ministry, India’s current account deficit (CAD) is predicted to worsen in the current fiscal year as a result of more expensive imports and weaker merchandise exports.

The CAD, which was primarily caused by a rise in the trade deficit, was 1.2% of GDP in 2021—22.

With an outflow of Rs49,469 crore – the largest since March 2020 – foreign portfolio investors (FPIs) were net sellers in the Indian equities market for the ninth consecutive month in June. This month’s sell-off has persisted, with net withdrawals totalling Rs7,432 crore from July 1 to 15.

Overall, FPIs have pulled Rs1.2 lakh crore out of the Indian equity market in 2022—2023, but local institutional investors have absorbed the sell-off (DIIs).

According to the most recent statistics, the nation’s imports increased by 57.55% to USD 66.31 billion in June compared to the same month last year.

According to estimates, the merchandise trade imbalance in June 2022 will be USD 26.18 billion, up from USD 9.60 billion in June 2021.
The expected merchandise trade imbalance in June 2022 was USD 26.18 billion, up from USD 9.60 billion in June 2021, a 172.72% increase. In June, imports of crude oil nearly doubled to USD 21.3 billion.

The month’s imports of coal and coke more than doubled to USD 6.76 billion from USD 1.88 billion in June 2021.

As retail inflation continues to exceed the Reserve Bank of India’s (RBI) upper tolerance limit of 6%, it is widely anticipated that the RBI may raise its benchmark interest rate for a third month in a row next month.

In recent months, the rupee has benefited from these countervailing pressures because it hasn’t declined as much as other emerging market currencies.