The Rupee depreciating to Rs 56 and more against the dollar may cause medium-to-long term concerns about managing the current account deficit. But it does hearten merchandise exporters who hope to gain from higher margins in the short term.
Economists are unanimous that the rupee’s depreciation will work wonders for the economy. Both exporters and the economists attributed the rupee slide (to Rs 56.17 on Wednesday, the lowest in a year) to the surge in the dollar against most global currencies barring a few in the wake of the quantitative easing in the US.
At the same time, however, they are apprehensive that if the trend continues, there is every possibility that the rupee will drop below Rs 60-62, unless the RBI intervenes.
A cheaper rupee was the best weapon that the government could use silently to curb imports, especially commodities like gold that posed a major macro-economic issue and drained out foreign exchange.
There is also a flipside to this.
The fall in the rupee would mean higher cost of import of fertilisers and raw materials that would make farm nutrients costlier. It would mean a higher fertilisers subsidy burden. The government would also have to spend more rupee funds to import crude oil.
The prime minister’s economic advisory council has projected a CAD of $100 billion this year, or 4.7 per cent of GDP . It had also projected a trade deficit of $213 billion.
Most economists think the rupee would stabilise in the band of Rs 53.50-to 54.5 in a few weeks. But they are not ruling out the possibility of the rupee going to Rs 57 - 58 and RBI intervention when that happens.
On Wednesday, dealers attributed the fall in the rupee to heavy demand from importers and banks. But, the inter-bank call money rates remained flat around its previous close of 7.30 per cent. The rupee has fallen heavily this month amid huge foreign inflows into stocks and debt.