Rupee falls past 67: Why further slide in the unit may not augur well for Narendra Modi govt in election year

With 80 percent of India’s crude oil requirements of oil refineries being met by imports, the nation remains vulnerable to gyrations in the foreign exchange market. One dollar hike in oil prices translates into a whopping US dollar 700 million to 900 million surge in the country’s import bills. It is a vignette the policymakers and government remember with trepidation.

Indeed, the value of the Indian rupee (INR) has had a direct if not a linear correlation with Indian oil prices. The oil prices have breached the US$ 75 per barrel mark, and it could move further north as hostilities in Syria go on unabated. The Gulf region remains the world’s bulk oil supplier what with Russia tending to discriminate in favor of its client states. And to the chagrin of oil importers like India, the Gulf region is always rocked by violence and chaos so much so that it is viewed as powder keg waiting to explode anytime. And should that happen, all hell will break out on the oil price front.

The steady US federal rate hike also is accentuating and accelerating the process of fall of the INR what with US bonds now giving an attractive 3.5 percent return. Small wonder debt funds are abandoning India and making a beeline for the US markets.

For foreign investors, what matters is not only the interest from the Indian debt instruments but also the foreign exchange rate. Even a substantial appreciation in debt portfolio could prove illusory if the Indian rupee has in the meanwhile plummeted. Let us take an example. If, for instance, investment in debt fund is $100,000 when the exchange rate was Rs 60 per dollar. Let us say now the portfolio is valued at Rs 70 lakh which at today’s exchange rate of say Rs 67 will buy only $1,04,477 for it, but should the INR slide to Rs 70, the number of dollars that could be taken back would be only 100,000 which spells no-profit-no-loss, making the investment poor in hindsight.

Foreigners are more worried about exchange rate fluctuations that could more than offset the attractive returns in India. This explains foreigners fleeing the debt market. Foreign investors, be in stocks or bonds, are fickle investors who simply cannot stay put in India.

Representative image: Reuters

Representative image: Reuters

The government has announced a massive Rs 16,000 crore defence equipment procurement to counter terrorism. This would result in greater demand for US dollars compounding our woes. Indeed, India’s import dependence both for oil, gold and defence equipments makes us a net buyer of the US dollar as well.

The Narendra Modi government wanted a defence-led Make in India revival of the economy that would have not only in the long run curbed our import bills but also provided employment to the teeming youth. Defence manufacturers, for reasons of secrecy, prefer to manufacture in their own countries and export rather than set shop in alien territories. Be that as it may.

The denouement must be particularly galling in an election year. Bloated oil bills always spell imported inflation. That is something the Modi government would have preferred to avoid in the run-up to the general elections in May 2019. Willy-nilly, sooner than later, it may have to cut excise duty and persuade BJP-ruled states to also cut VAT on petroleum products because even the die-hard Modi supporters would turn nasty if inflation is not contained. Fiscal pundits aver that the governments do not have this luxury given the tight fiscal position they are in, but then in an election year such niceties as fiscal deficit have to yield to the dangerous prospect of incurring  the electorate’s wrath.

(The writer is a senior columnist and tweets @smurlidharan)

(The volatile rupee is a concern and the RBI might intervene to restore sanity)


Updated Date: May 08, 2018 13:22 PM

Also Watch

IPL 2018: Royal Challengers Bangalore eye revival against Chennai Super Kings as 'Cauvery Derby' comes back to life
  • Thursday, April 26, 2018 In the Kanjarbhat community, a campaign against 'virginity tests' is slowly gaining ground
  • Tuesday, April 24, 2018 It's A Wrap: Beyond the Clouds stars Ishaan Khatter, Malavika Mohanan in conversation with Parul Sharma
  • Monday, April 9, 2018 48 hours with Huawei P20 Pro: Triple camera offering is set to redefine smartphone imaging
  • Monday, April 16, 2018 Rajyavardhan Singh Rathore interview: Sports can't be anyone's fiefdom, we need an ecosystem to nurture raw talent

Also See