Rupee depreciation increases inflation, but makes exports competitive: Experts

New Delhi: The depreciation of the rupee has impacted the current account deficit and fueled inflationary pressures, but at the same time made Indian exports more competitive, according to experts.
The Indian rupee is weakening against the US dollar and is close to the psychologically important mark of 80, making imports costlier.
“The depreciation of the rupee has many effects on the economy. Given that we have a negative trade balance, although the depreciation of the rupee makes our exports more competitive, our import bills go up significantly.
“This affects the current account deficit and thus puts pressure on the rupee as well as on import inflation as the price of imports is higher in rupee terms,” ​​said Ranan Banerjee, leader of economic advisory services, PwC India.
A recent report by the Finance Ministry has warned that India’s current account deficit (CAD) is likely to worsen in the current financial year due to costlier imports and lesser goods exports.
The CAD stood at 1.2 per cent of GDP in 2021-22, mainly driven by an increase in the trade deficit.
Rumki Mazumdar, Economist, Deloitte IndiaSaid that global inflation and rising commodity prices, increasingly tighter monetary policy in advanced countries, rising geopolitical tensions, fears of a global economic slowdown and even a possible slowdown in the US amid some major economic uncertainties Dollar has strengthened. European nation.
However, currency depreciation doesn’t always hurt the economy, she said.
“The opportunity to boost services export revenue on the back of the global digitization wave is promising. A weak domestic currency is also an opportunity for FPIs to enter the equity market to earn great returns in the medium to long term,” he added.
Foreign portfolio investors (FPIs) were net sellers in the Indian equity market for the ninth consecutive month in June, with outflows of Rs 49,469 crore – the highest since March 2020. Selling continued this month, with net outflows. 7,432 crore during July 1-15.
Overall, FPIs have so far pulled out Rs 1.2 lakh crore from the Indian equity market in 2022-23, but the selloff by domestic institutional investors (DIIs) has been absorbed.
Aditi Nair, Chief Economist, ICRA Ltd, was of the opinion that a weaker rupee will partially counter the fall in commodity prices, bucking the fall in wholesale (WPI) and retail (CPI) inflation over the next few months.
“Similarly, the beneficial effect of declining input costs on corporate margins will be mitigated. The weaker INR will help protect some export competitiveness, the sharper rate recorded by several emerging market (EM) currencies than INR in recent periods. Looking at the decline,” he added.
Khalid Khan, vice-president of exporters’ body FIEO, said while the rupee depreciation would help exporters, exporting goods having import material would not benefit so much in terms of raw materials.
An article published in its recent bulletin said that amid a hostile international environment, close and constant monitoring of the growing trade deficit and portfolio outflows is essential, despite a strong reserve buffer.
According to the latest data, the country’s imports in June increased by 57.55 per cent to $ 66.31 billion from the same month a year ago.
The trade trade deficit was estimated at $26.18 billion in June 2022 from $9.60 billion in June 2021, an increase of 172.72 percent.
Crude oil imports nearly doubled to $21.3 billion in June.
Coal and coke imports doubled in the month to $6.76 billion, against $1.88 billion in June 2021.
It is widely expected that the Reserve Bank of India (RBI) may hike the key interest rate for the third consecutive month next month as retail inflation continues to reign above 7 per cent – with its upper tolerance limit exceeding 6 per cent.
Banerjee further said that a similar rate hike by the RBI in response to the actions of the US Federal Reserve will also support the rupee.
He said these counterbalancing forces have helped the rupee over the past few months, which has not depreciated to the extent of other emerging market currencies.

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