Is India really defenceless against Currency Rate Fluctuations !?…Are RBI measures in this regard merely cosmetic as determining factors are not in their control ?
Well it certainly appears so if you reckon that the chief determinant of the rate is the quantum of Dollar Inflows and outflows
A Report released yesterday by HSBC Holdings Plc from Singapore has it’s economist,Robert Prior-Wandesforde, forecasting the Rupee to weaken further in 2009 to Rs 54 to the US Dollar.It currently is stable at Rs 48.66 but unlikely to remain so
The Report attributes the Rupee Decline against the Dollar in 2008 to the significant Dollar Outflows from Equity
In 2008 there was a reversal of US $ 13.1 Billion from Equities by FIIs…By the same logic the significant Dollar Inflows of US $ 17.2 Billion into Equity in 2007 would have strengthened the Rupee to drop below Rs 40 to a Dollar in Dec 2007/Jan 2008
India’s latest Foreign Reserves Position as on February 6,2009 is US $ 252 Billion
It would then seem that under 10% Equity inflow/outflows of Dollars of our FX Reserves could cause an over 20% fluctuation in the Exchange rate of the Rupee against the US Dollar !
What the Report fails to highlight is that what compounded the problem in 2008 was the steep escalation in the Crude Oil Price that crossed a record US $ 140/barrel in mid 2008
India is a net Importer of over 100 million tonnes and it has been hit by the double pressures of Record Oil Price and the Weak Rupee
The Weak Rupee and The Record Oil Price has also affected our Fertliser subsidy.As on January 2009,the subsidy had reached a record Rs 102000 crs,up from Rs 36000 crs last year…It is expected to close in March at Rs 114000 crs…The Interim Budget on February 16,2009 will reveal more.In 2007/8 The Urea Import was 4.718 Million Metric Tonnes…In Ten Months this Fiscal 2008/9 it has already reached 5.713 Million Metric Tonnes and by March will be nearer 6.5 Million Metric Tonnes…that’s More Imported at Significantly Higher Costs
How can you expect RBI to have any sort of control on Global Commodity Pricing ?…what it is striving to do is to cushion the destabilising Impact on the Rupee
A depreciating Rupee does help Exports…but we’re in a Year where Exports have slumped on account of Global Recession and Global Competition…Textiles,Diamonds,Auto…many companies in export driven sectors are facing survival issues
However with Crude Oil prices sharply dropping to US $ 40/barrel,India should benefit from much lower Fertliser Subsidy and Oil Bill in 2009/10
The Minus 2% Growth Rate in the December Index of Industrial Production is the worst on record since 1993
Clearly a further Fall in Interest rates is on the Horizon
2009 clearly is going to be a Tough Global Year and the Impact in India is already being felt…equity outflows,credit contraction,slowdown in Infrastructure Spending,slackening Industrial Production,Rising Import Costs on Account of Crude Oil and Urea Imports,Employee layoffs in Millions in Textiles,Diamond and other Export Driven Industries and in Real Estate and Finance Sectors too
The Silver Lining for the Rupee remains the Potential of a Steep Dollar Collapse as USA battles unprecedented Economic Woes
We need to intensify our decoupling process from USA if we truly want to benefit from a falling Dollar….challenging in these times where we may need to ally with the USA for reasons other than Financial…more geo-political