Slip Sliding On The Rupee

As fiscal discipline unravels in the wake of the weakening rupee, government measures to shore up the currency have failed to cheer investors and markets.

- Shweta Punj & M.G. Arun

For once, the fiscal discipline that Union finance minister Arun Jaitley painstakingly put in place has gone awry, triggering panic in the financial markets and sending policymakers into a huddle. The culprit: the free-falling rupee, which is making imports in a fuel-guzzling country like India costlier, widening the current account deficit (CAD), with the value of imports overshooting that of exports. India’s CAD is expected to widen to 2.8 per cent of the GDP for the fiscal year 2018-2019 from 1.9 per cent in the previous fiscal.

The rupee, which hovered around 68.50 to a dollar until a month ago, has suddenly plunged by nearly 4 per cent over the past one month and is inching towards the 73 mark (it ended at 72.97 at the close of trading on September 18). Rising crude prices at around the $80 a barrel mark, concern over higher interest rates in the US, the free fall of the Turkish lira following an economic crisis in that country and tensions in US-China trade have rocked emerging markets. India’s been no exception. Rising global oil prices, coupled with a sharp depreciation in the rupee, create a double blow for the CAD as the country’s import bill spikes even as the volumes remain the same.

A weak rupee not only hurts the country and its importers but it also stokes inflation. The situation will be keenly watched by the Reserve Bank of India (RBI), which may go for another interest rate hike in an effort to contain inflation, making home and industrial loans costlier. In August, the RBI’s Monetary Policy Committee (MPC) had raised the repo rate by 25 basis points (bps) to 6.5 per cent. It was the first time since October 2013 that the rate was increased at consecutive policy meetings. In June this year, the MPC had increased the key rate by 25 bps.