The Indian rupee’s weakness against the dollar is continuing and the currency was trading at 62.17 against the US dollar in the morning session on Thursday on ramped up demand of the dollar from oil importers. The fall in equity markets is also putting pressure on the currency.
Although a weaker rupee is beneficial for exporters, it renders country’s imports costlier as payments are made in dollars. This would further add to the current account deficit (CAD) which has already widened to $10.1 billion or 2.1% of GDP in Q2 of the current financial year from $5.2 billion or 1.2% of GDP during the same period last year.
Apart from crude oil, the country imports various merchandises such as edible oil, machinery, coal, transport equipment, chemicals and plastics, and not to mention, gold.
However, despite weakening of the rupee it still remains one of the strongest currencies against the dollar among emerging markets. Since April 1 this year until Dec 8, the rupee has depreciated just by 3.2% against dollar, compared with Russian rouble (-49.3%), Brazil’s real (-14.4%), Indonesia’s rupee (-9.5%), South Africa’s rand (-8.4%), and Turkish Lira (-6.1%)
The rupee’s continued weakness should not be viewed in isolation, say analysts. The fact that both the headline and retail inflation in the domestic economy has now been considerably brought down, expectations of a higher economic growth in the coming year and the steady fall in the country’s CAD are enough positive signals to infuse optimism in the economy.
Further, the softening of crude oil prices in international markets is a great sigh of relief. Crude oil contributes the largest in the country’s import bill as well as the CAD. However, since the international crude oil prices have softened by almost 40% since June this year, the weakening of the rupee shouldn’t be a cause of concern, as of now at least. In case, the rupee plunges further, RBI could most likely intervene in the forex market to check the slide, as has been the case in the past.