Rupee at risk

Sep 25, 2018-

Amidst several parameters going askew for the Indian economy, two—its current account deficit and its sliding rupee—are attracting the greatest outcry, more so because of the shrill assault that the present Prime Minister had launched against his predecessor during the 2013 slide of the rupee. At 72.23 to the dollar, the Indian rupee is among Asia’s worst-performing currencies with nothing on the horizon auguring well for it, particularly with there being no reason to expect a decline in oil prices. The 2014 oil price decline had helped stabilise the rupee after the 2013 debacle. With oil imports a given, not all the cheer about improved exports spurred by a weaker rupee can do much to change India’s sharply widening trade deficit, at $17.39 billion in August 2018, thanks to imports surging 25.4 per cent to $45.24 billion.

India’s current account deficit (CAD) widened to $15.8 billion in the second quarter of 2018 from $14.9 billion a year earlier (2.5 per cent of the GDP). Currently, portfolio investments are under pressure and the first quarter of 2018 has seen a net outflow of $8.1 billion on this account from a happy inflow of $2.3 billion inflow in the last quarter of 2017. The International Monetary Fund assesses that global markets may not be able to finance a CAD above three per cent of GDP and even optimistic projections place the CAD at 2.9 per cent of the GDP.

In essence, India may well have kick-started a vicious cycle with a higher CAD putting

the rupee under greater pressure, increasing costs of overseas borrowing, further

affecting India’s foreign exchange reserves, which have been falling over the past

few months.

Published: 25-09-2018 07:46

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