Slowly, Slowly Manage Rupee

RBI may target 3-4% depreciation per month till trade deficit, at a record high, remains a problem

- Neelkanth Mishra

With oil prices up, a record trade deficit of $70.25 billion in the April-June quarter, rupee sliding and GoI taking some policy calls, India’s responses to external sector challenges are crucial. Here’s how to read the problem.

How critical is the impact of energy price surge?

It is a severe headwind. Net energy imports were $150 billion last year, 5% of GDP. If prices remain elevated for a year, this can rise by nearly $80 billion. This creates two somewhat related problems, which need different solutions.

● First, a drag on domestic demand, as Indians cut down on consumption of other products to pay more for fuel, coal, fertilisers and edible oil.

● Second, a balance-of-payments deficit: the demand-supply of dollars. India collectively consumes more than it produces, imports more than it exports, paying for it by selling assets to foreign investors or companies or borrowing in dollars. Given higher energy prices, India needs more dollars to pay for it. From a reasonable surplus before February, India now runs a $45 billion deficit per year, nearly 1.5% of GDP.

How will various GoI measures affect the economy?