Policy rate cut unlikely as dollar, crude prices rise: ASSOCHAM

Policy rate cut unlikely as dollar, crude prices rise: ASSOCHAM

Huge outflows in the emerging economies have exerted pressure on their currencies.

The Dollar Business Bureau 

A mounting pressure on rupee against dollars, strengthening US interest rates and rebounding of the crude oil prices may have adversely affected the Reserve Bank of India’s decisions for policy interest rate cut, an ASSOCHAM study on Sunday noted.

“It is true that there is ample liquidity in the banking system following demonetisation and lowering of inflation both at the WPI and CPI levels, but then this cannot be taken as a normal situation. Once the scrapped Rs.500 and Rs.1000 notes are replaced and fresh currency is injected back into the system fully, the ball game would change,” the paper said, highlighting that certain commodities such as sugar and wheat are witnessing firming of prices.

The study also pointed out several global risks including strengthening of the US dollar, bringing international money back into the American market and said that emerging economies have registered huge outflows, which have exerted pressure on their currencies.

“While India may get consolation from the fact that we are less affected, the fact is we are amongst the largest crude oil importers in the world and net importing country. So, the dollar strengthening has a direct and immediate impact on the country’s overall balance of payment position and would lead to inflation in the medium term,” it said.

“We are slowly moving away from a highly beneficial position of low crude oil prices and a stable and strong rupee which made the landed cost of energy quite cheap. This has helped the government finances and also benefited the consumers. Now, we are getting into the reverse position where crude oil is firming up and rupee is becoming weaker. Thus, it would be a double whammy of increased import bill in dollar terms and on top of it, higher landed cost on account of weaker rupee,” ASSOCHAM President Sunil Kanoria said.

The study, however, underscored that although the weaker Indian currency may be a good piece of news for India’s exports, it would also enhance competition from the country’s several competitive including China, Bangladesh, the Philippines and Vietnam. “The Chinese currency is melting against dollar, helping its exporters in the process. Thanks to weakening of the Renminbi, Japan has overtaken China as the largest holder of the US treasuries,” it said.

The study also referred to two of the most prevalent domestic issues: the recently announced demonetisation move and the delay in Goods and Service Tax (GST) framework - and said while demonetisation impact is yet to reflect on India’s Gross Domestic Product (GDP) growth, the uncertainty over the GST implementation date continue to ring alarms in the domestic industry. 

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The Dollar Business Bureau - Dec 19, 2016 12:00 IST