Rupee may slide to 55.10 against dollar by March 2012 if the global economy continues to be bleak, says Assocham

Thursday, November 24, 2011 Amid rising oil import bill and external debt, the rupee-dollar exchange rate could well reach the levels of 53.80 by January next year and 55.10 by March if the global economy continues to be bleak like in recent months, says Assocham. If the Eurozone and the United States start showing signs of recovery and foreign funds start flowing back to India, the exchange rate will settle around the new normal level of 49.50.

The rupee started tumbling after the downgrading of US credit ranking and increasing threat perception of Greece defaulting on sovereign debt. It slid against the dollar from 44.40 in July to 45.50 in August, 47.60 in September, 49.30 in October and 52.70 this month.

It could further slip to 53.10 in December, 53.80 in January 2011, 54.50 in February and 55.10 in March, said Assocham in its latest study titled ‘Exchange Rate Slide – What Impact is it Having?’

Since India is structurally an import intensive country as reflected in high and persistent current account deficits month after month, domestic costs will rise. The rupee depreciation will particularly hit industrial sector and put higher pressure on costs as items like oil, imported coal, metals and minerals, imported intermediate products are getting affected.

Despite Brent crude oil price coming down from 118.46 dollars per barrel in April to 109.03 dollars in November, there has been increase in import price to the extent of Rs 489.80 per barrel as the rupee came down from 44.40 to 52.70 to a dollar.

A falling rupee has also impacted cost of borrowing for the corporate sector. Indian companies raised 29 billion dollars this calendar year through external commercial borrowings and foreign currency convertible bonds. “If current valuations persist, they will end up paying five billion dollars more,” said Mr Rawat.

India’s external debt is dominated by dollar to the extent of 54.2 per cent. The rupee depreciation by 16.54 per cent between April and November is bound to increase interest payments. Between June and November, the total external debt increase by Rs 21,860 crore.

India is not alone though. The crisis prevailing in the West is hurting all major economies worldwide. Barring China, currencies of Brazil, South Africa, Mexico and Russia have taken a hammering.

The falling Bombay Stock Exchange (BSE) index is partially an indication that foreign institutional investors are selling out, putting pressure on the rupee value, said the ASSOCHAM study.

Instead of intervention by the Reserve Bank of India and burdening foreign exchange reserves, India should stagger oil imports demand and coordinate purchases so that there is no undue bundling of imports at any time.

Assocham study concludes that the government can take initiatives which encourage flow of foreign investments into the country. Recent steps to consider allowing foreign direct investments in pension fund or increase in investment limit in government securities and corporate bonds are in the right direction. Allowing FDI in multi-brand retail and civil aviation industry can also attract many foreign investors, says Assocham

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