Wobbly rupee complicates RBI efforts

“We will see a rise in import costs. It has complicated the efforts of the RBI. We won’t be able to take advantage of the recent fall in crude oil prices as the rupee fall will more than neutralise it. There’re no foreign inflows also… and twin deficits (fiscal and current account) are posing problems,” said Arun Singh,chief economist,Dun & Bradstreet. Most experts now rule out a rate cut in the near future,at least till the situation stabilises on both external and internal fronts. With inflows slowing down,current account deficit,which crossed 4 per cent,is expected to worsen further.

Inflationary concerns in the economy have resurfaced yet again following the sharp increase in prices for food articles. Even as core inflation remained in comfort zone,indicating abatement of demand side price pressures,the impact of pass through of increased rail freight and fuel cost and hike in indirect taxes will keep inflationary pressures on the upside. Moreover,depreciation of the rupee beyond current levels would exacerbate inflationary pressures. “In such a scenario,there is very limited space for the RBI to consider policy easing in near future even as there are clear signs of economic growth slowing down,” Singh said.

Further,renewed pressure on balance of payments coupled with the RBI intervention to stem the pressure on the rupee has aggravated inter-bank liquidity tightness. When the RBI sells dollars to support the rupee,it mops up an equivalent amount in rupees. Since November 24,2011,the RBI has injected liquidity of $25.5 billion through OMOs.

Indranil Pan,chief economist,Kotak Mahindra Bank,said: “Tackling the situation may not be simple and the focus should be on a near-term effort to curb imports and medium-to-long-term effort to raise exports. In this context,the government needs to take quick decisions with respect to domestic policies in areas of items like coal,gold,fertilisers,etc.”

“There has already been an attempt to contain gold imports by raising customs duty. Exports need to be tackled with a medium-to-long-term strategy such as re-looking at the policies governing SEZs,providing impetus to manufacturing sector,indigenisation at infrastructure industries,etc,” Pan added.

According to a Deutsche Bank report,“more capital account measures are in the pipeline,such as taking oil importers out of the forex market and providing them with dollars directly from the RBI,further tariff or restriction on gold import and so on.”