The Reserve Bank of India’s move to curb currency volatility, even if it may eventually come at the cost of higher borrowing rates for consumers, clearly mirrors the sense of urgency among India’s monetary and fiscal authorities to stem the rupee’s slide.
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth. So, consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospects of decent salary hikes recede because the economy is struggling.
It’s not just households. Companies that import raw materials are badly hurt, and this will further hurt economic growth.
India’s wholesale price index (WPI)-based inflation, the country’s main gauge for economy-wide price movements, inched up to 4.86% in June, reversing a four-month falling trend on higher food prices.
A sub-5% WPI-inflation is still well within the RBI’s comfort zone, but with high retail inflation that looks good to canter well into double digits this month, the central bank will unlikely slash lending costs in its July 30 review meet.
Estimates show that a sustained 10% rupee depreciation, adds roughly 1 percentage point to headline wholesale price inflation. Higher diesel and petrol prices would knock up the cost of ferrying goods, including food items, across locations, which, in turn will push up overall prices.
It’s not just soaring fuel costs that will push food prices up. A weak rupee will raise prices for most manufactured and imported goods — a large component of a household’s monthly grocery consumption such as pulses and edible oil. For instance, India is a net importer of pulses — a key staple for most families.
A weak rupee means it will push up the cost of essential food items. Eating out could be even costlier as restaurant owners are likely to jack up rates to cover for rising processed food and cooking fuel costs.
Edible oil and pulses import grew sharply by 15.5% and 26.21% respectively in 2012-13 compared to the previous year, driven by flat domestic production and rising consumption demand. A weak rupee will raise the landed costs of these staples.
The rupee is falling because foreign investors are selling the currency, preferring instead to plough into the US market, which is showing signs of resurgence.
The RBI’s moves, at the very least, are clearly targeted at curbing punters from dominating the currency market. It’s important to keep speculators at bay, because too much is at stake for the Indian economy.