The RBI should let the rupee rally against the dollar to contain imported inflation coming in mainly from crude prices and help push exports, as the current account risks from rising oil price can be contained at 1.4 per cent of GDP, according to a report. Rallying crude and the resultant fear of the current account deficit have seen the rupee going down from 73.09 on September 1 to a low of 75.52 to a dollar on October 12. But it has again started appreciating and is presently at around 75, visible from forex market turnover -USD 2.2 billion of excess dollar supply in August – clearly showing the appreciating bias on the rupee.
The Reserve Bank has been continuously making forex purchases, and in FY21, it bought Rs 5.1 lakh crore worth of forex and the forex reserves swelled by USD 103.72 billion. Despite the second wave, the rupee gained strength and even went below 73 to a dollar, SBI Research said on Thursday in its report.
Taking everything into account — robust FDI inflows amid some volatility in FPI inflows of late — our CAD projections stand at 1.4 per cent of GDP for the full year, which is comfortable, and if there is no extremely devastating third wave, the rupee is going to handle any taper news with relative calm, the report noted.
Considering higher domestic inflation, as supply disruptions mount, it will not do any harm for the RBI to lean with the wind and let the rupee appreciate, as it can lead to reduced imported inflation when metal and oil prices are rising, and clearing the liquidity overhang to some extent, it added.
This is more so since our backward linkages in the global value chains is higher than forward linkage and a weak rupee may not help in pushing the exports as much as is touted by traditional economic theory, the report said.
The report also said that the RBI has been globally applauded for its effective exchange rate management. The IMF in its recently released article IV consultation welcomed the authorities’ commitment to maintain exchange rate flexibility.
Noting that wholesale price inflation has averaged at 11.6 per cent in H1 of FY22, and CPI at 5.34 per cent, the report said since the onset of the pandemic in 2020, consumer price and wholesale price inflation rates have been exhibiting considerable pergence.
Such developments miss the concerns of manufacturers who are grappling with extremely high imported inflation and a falling rupee just adding to their woes, it added.
The current rally in oil prices due to a global supply shortage and strong demand as the world recovers from the pandemic is reminiscent of the early 2010s when oil was way above USD 100 a barrel.
The current account deficit, which had touched a high of 4.82 per cent of GDP in FY13, started declining and has not gone above 2.1 per cent since then.
However, the rising crude prices and overall supply-side bottlenecks due to the pandemic are raising concerns again and between May and September 2013 the rupee lost as much as Rs 14 a dollar.
September 2021 merchandise trade deficit at USD 22.59 billion is quite high and has the closest counterpart in October 2012 when it was USD 20.21 billion.
So far exports have been doing quite well with merchandise exports in H1 of 2021, touching USD 197.9 billion, a robust increase of 24.3 per cent over USD 159.2 billion in H1 of 2019.
Thus, achieving the target of USD 400 billion is not a pipe dream and this will provide a strong cushion to the current account balance, even if the oil import bills rise rapidly, the report said.