Rupee News: Rupee touching 80 to a dollar doesn’t mean Indian fundamentals are very weak: Mythili Bhusnurmath – The Economic Times

lipped from: https://economictimes.indiatimes.com/markets/expert-view/rupee-touching-rs-80-to-a-dollar-doesnt-mean-indian-fundamentals-are-very-weak-mythili-bhusnurmath/articleshow/92890764.cms

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Rupee touching 80 to a dollar doesn’t mean Indian fundamentals are very weak: Mythili Bhusnurmath

By

Tamanna Inamdar

,ET NowLast Updated: Jul 15, 2022, 11:09 AM IST

Synopsis

“I do not think we need to look at Rs 80 to a dollar as though the skies have fallen. They have not; but yes, it does create problems for us, particularly as far as inflation is concerned because imported inflation will rise at a time when inflation is already very high.”

“To think of the rupee value as reflecting the weakness of the Indian economy would be a very simplistic way of looking at it. In macroeconomics, we do not have these neat one to one solutions. There os the irony of the US perhaps heading into a recession or perhaps already there and the US dollar being the safe haven precisely because of its international reserve currency status,” says Mythili Bhusnurmath, Consulting Editor, ET Now

As the rupee goes into a freefall, the response that is coming in from the government is that it is not a rupee problem, it is more of a dollar strengthening problem. Is that the way to look at it?
Well the dollar is certainly strengthening and with the Fed all set to raise interest rates given the fact that inflation has come in at a 41-year high, this is going to continue, the trend is going to continue, the rupee is going to weaken further. The fact that other countries’ currencies are also weakening is not much of an answer really simply because of the implications of a weakening rupee for us.

At a time when inflation is already pretty high in India also, a weakening rupee means further imported inflation, given that we import about 80% of our oil requirements that also has huge implications for our current account deficit. For our fiscal deficit, since the government beyond a point does not want to pass on the higher prices to consumers, because even though we say technically oil prices have been deregulated, we have seen that every time there is an election, every time prices rise too much, the government does intervene.

The RBI has always said that they are not so concerned about the level of the rupee and rather they are trying to control volatility. Yesterday, the Bank of Canada, the Central Bank of The Philippines, the Monetary Authority of Singapore all raised their interest rates. So there is only that much countries can do as long as the US dollar strengthens.

We have this peculiar situation where the USA says it is heading into a recession but the dollar is considered as the safe haven. That arises out of its international reserve currency status and as a result, when the dollar is flowing out of countries like India, the rupee is going to weaken. So yes it is largely correct that the rupee is weakening mainly because the dollar is strengthening but that does not make life any easier for us unfortunately.

Does this signify the weaknesses in the Indian economy because we are a current account deficit economy; we depend largely on imports of crude, etc. Is all of that also being reflected in the rupee-dollar rate today?
The fact that our fundamentals in terms of high fiscal deficit, a relatively high current account deficit and also the fact that we are dependent on oil imports and oil prices have been high, is not a recent phenomenon. It has been there for the past quite a few months ever since the Ukraine conflict started in February. But the rupee depreciation is relatively much more recent.

So to think of the rupee value as reflecting the weakness of the Indian economy just because it might touch Rs 80 to the dollar would be a very simplistic way of looking at it. In macroeconomics, we do not have these neat one to one solutions. You have the irony of the US perhaps heading into a recession or perhaps already there and the US dollar being the safe haven precisely because of its international reserve currency status.

There are no neat answers in macroeconomics, but contradictory signals. How is it that an economy which is almost going into recession, where growth was negative in the first quarter, and contracting in the second quarter as well but jobs data looks very good. So there are these different conflicting signals. It is not easy to say that just because the rupee has touched Rs 80 to a dollar that means Indian fundamentals are very weak.

Yes sure our fundamentals are not as great as they were before Covid but that is true of every economy and this is a function of the relative strength of the various exchange rates. It is a fact that the rupee has weakened primarily against the dollar but not against other currencies and every currency has weakened. It is a fact that we have substantial reserves though that has fallen as the Reserve Bank has tried to defend the rupee.

So all said and done I do not think we need to look at Rs 80 to a dollar as though the skies have fallen. They have not; but yes, it does create problems for us, particularly as far as inflation is concerned because imported inflation will rise at a time when inflation is already very high. WPI is at 15.01% which is not a comforting factor at all. 15 consecutive months of double digit WPI will feed into our consumer price inflation and that is a bigger worry for us.

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