A budding recovery in the US has strengthened the dollar making the rupee plumb new depths hitting a record low of 61.21 on Monday —and that contains inflationary cascading effects that may hurt chances of interest rates coming down.
The Indian currency hit ended at a record low of 61.21 on Monday on heavy dollar selling by foreign funds on fears of US Federal Reserve winding down its $85-billion monthly bond buying programme following strong US jobs data.
The continuing political unrest in West Asia also raised concerns about potential supply disruptions, sending crude oil prices soaring to three-month high over the last one week.
Together, these have added the string of India’s woes, struggling to claw out of a decade-low growth of 5% in 2012-13.
Costlier crude will prompt oil companies to further raise retail transport fuel prices to cover for higher import costs. This will raise the cost of ferrying goods across locations and can potentially increase prices of goods and services, limiting the Reserve Bank of India’s elbow room to slash interest rates.
So, don’t expect your equated monthly installments (EMIs) to come down soon.
Every one rupee fall against the US dollar raises the costs for oil companies by 75 paise per litre, according to oil ministry estimates. Oil companies are currently selling diesel at Rs. 8.10 a litre below market prices.
The relentless fall in the rupee, coupled with hardening crude prices, will likely bloat the import bill further, prompting oil firms to raise fuel prices even more.
Last month, oil companies raised retail petrol prices by Rs. 1.82 a litre, the third hike during the month. Diesel prices have been raised by 0.50 paisa a litre every month.
“The firms will ask the government to pass on a higher ‘one time increase’ in diesel prices to consumers as a fallout of the fall in rupee value,” an official said.
Though the rupee managed to stage some recovery today with the help of the RBI, experts say that it may not have enough capacity to support rupee by selling dollars.
India’s current account deficit (CAD)-the difference between dollar inflows and outflows-- hit a record 4.8 % of gross domestic product (GDP) in the financial year ended March 31, 2013.
Though rupee is likely to remain weak in coming days but in the medium term experts see some strengthening in the Indian currency.
“We expect CAD to improve (in coming months). We are already seeing noticeable dip in gold imports, probably also non-oil, non-gold imports as well,” said Ananth Narayan, co-head - wholesale banking, South Asia, Standard Chartered Bank.