Sliding rupee to make crude oil import dearer

NEW DELHI: The Indian rupee sliding to a historic low of 81.09 to a dollar will make import of crude oil and other commodities expensive further fuelling inflation which for the past several months has remained above the Reserve Bank’s upper tolerance level of 6 per cent.

The pressure on the domestic currency, which is mainly due to repeated hikes in interest rate by the US Fed, is likely to continue with rise in trade deficit and gradual withdrawal of funds by institutional investors.

The Reserve Bank, which is scheduled to announce its bi-monthly monetary policy later this week, is expected to increase the repo-rate or the short-term lending rates by 50 basis points in a bid to tame inflationary pressure.

For a nation that is 85 per cent dependent on imports to meet its oil needs and 50 per cent for gas requirements, a weakening rupee has a bearing on domestic price of fuel.

India’s trade deficit more than doubled to $27.98 billion in August due to increased crude oil imports. Import of ‘petroleum, crude & products’ stood at $17.7 billion in August this year, an annual increase of 87.44 per cent.

India’s forex kitty continued its southward journey, with the overall reserves declining by $5.219 billion to $545.652 billion for the week ended September 16. The reserves, which have been dipping as the central bank deploys the kitty to defend the rupee amid pressure caused majorly by global developments, had declined by $2.23 billion to $550.87 billion in the previous week.

SBI in a report said global commodity prices have remained volatile after their fall in June from historical highs. Prices edged up during late July - early August, before moderating towards the end of the month, largely driven by concerns over demand slowdown.

Crude oil prices are trading decisively below $100 per barrel with heightened volatility due to expectations of an imminent slowdown in global demand, it said.

“A depreciating INR will partly counteract the benefit of lower commodity prices on inflation,” said Aditi Nayar, Chief Economist, ICRA.

Solvent Extractors’ Association of India ED BV Mehta said the cost of imported edible oils will go up. The country imports about 13 million tonnes of edible oils every year. “Ultimately, this will be passed on to consumers. However, the only silver lining is India’s oilseed sector exports...The rupee depreciation will boost export realisation and support export,” he said. Imports of vegetable oils stood at $1.89 billion in August 2022, up 41.55 per cent over the same month last year.

As per the SBI report, no central bank can prevent currency depreciation currently and RBI may allow the rupee to depreciate for a limited period. Foreign currency assets of RBI have declined by $75 bn since Ukraine War, in order to protect the rupee, it said