MUMBAI: One reason for RBI’s reluctance to aggressively intervene to support the plunging rupee is to check the sharp rise in imports of electronic items like mobile phones, battery chargers and cameras that contributed significantly to widen the country’s trade deficit. A weaker rupee makes these goods more expensive, dissuading imports.
Data from the ministry of commerce showed such imports rose 26 per cent in July and part of the $43.79 billion monthly imports, which in dollar terms rose 29 per cent year-onyear, widening the trade deficit for July 2018 to $18.02 billion up from $11.45 billion in July 2017.
Bankers and economists said allowing the rupee to weaken could curb imports capping the rise in the current account deficit (CAD), which is sum of all transactions between India and its trading partners. India’s CAD widened to $15.8 billion, or 2.4 per cent the country’s Gross Domestic Product (GDP), in the quarterended June, the highest in four quarters and up from 1.9 per cent reported for the quarterended March.
“All imports will be hit, including electronics (items). We cannot say that foreign exchange policy will be used to curb imports because there are other ways like an increase in taxes. However, this could be a way for the RBI to dissuade these imports and bring some control on CAD,” said Ashish Vaidya, head trading – India, DBS Bank.
The Indian rupee is Asia’s worst performing currency having lost 7.79 per cent of its value in the past six months. The RBI will have to fend off rising political pressures to spend more foreign exchange to defend the rupee if it hopes to stick to its strategy. On Monday, agencies quoted a finance ministry official saying that the government is in reg- u l a r touch with RBI and will take necessary steps to controlling the currency’s fall. “Markets need not panic about the depreciating rupee. There is a wrong impression in the market that the government is not worried about falling rupee. The government and RBI will not shy away from taking measures on depreciating rupee,” the official said. A Prasanna, chief economist, ICICI Securities Primary Dealership, said for the rupee depreciation to have a material impact on demand for imported electronic and consumption goods, the RBI will have to stick to its path.
Source: economictimes.indiatimes.com