When the US, buoyed by a reviving economy, raises interest rates sometime after June, it will likely lead to a spike in the dollar, pushing up household fuel bills and hitting overseas travel plans. The greenback is also the currency that India pays to import crude — the commodity key to our inflation and fiscal numbers.
While the schedule for the rise is still sometime away — likely in the June-September period — the dollar’s dominance in all trade transactions implies that the rupee, oil prices, inflation and current account deficit — the gap between export earnings and import payments — could get adversely affected. The flight of capital may also hit stock markets.
A rise in US interest rates typically pushes up the value of the dollar, which in turn makes imports, mostly crude, costlier, leading to a cascading impact on prices and inflation.
The caveat: while crude prices and currency rates have an inverse relationship, the quantum of dollar rise and the resultant fall in oil prices will have to be considered to see the impact on India’s import bills.
However, with RBI building ammunition in the form of forex reserves, which are now at $340 billion, the impact is likely to be minimised, said Shubhada Rao, chief economist at Yes Bank.
On Thursday, the rupee opened at 62.39 to the dollar, and strengthened to 62.36, its sharpest rise in a week, before paring gains to end at 62.52. While this is within the 61.50-63.50 band that currency traders expect the rupee to move, most intermediaries concur that volatility in the currency markets is likely.
This is also expected to affect Indian companies, something which IMF MD Christine Lagarde cautioned during a lecture at RBI headquarters on Tuesday. She pointed out the doubling of corporate sector debt in the past five years to $120 billion.
“The IMF’s concern is based on the fact that local companies have been reluctant to hedge their forex exposures as the cost of hedge is high,” said Ajay Srinivasan, CEO, financial services, Aditya Birla Group.
Although a weak rupee is good for exports and hence a positive for IT, pharma and automotive industries, since the dollar rise would affect all emerging markets, the benefit for India in the form of cheaper exports would not be significant, as most markets for India would be affected. Also, global trade in this area is determined more by quantity than value. “There is a natural hedge that insulates exporters from currency fluctuations. I don’t see any major impact from the dollar rise,” said VS Parthasarathy, CFO, M&M.
“The most visible impact would be on currency and inflation,” said Saugata Bhattacharya, senior vice-president and chief economist at Axis Bank.