New Delhi: The rupee after registering a life-time low at 72.91 appreciated by 60 paise in late trade on Wednesday. However, the masses will only stop feeling the pinch once fuel prices come down.
Experts are of the opinion that petrol and diesel prices will surge further due to lack of supply in the global oil market.
“In the near future what we can expect fuel prices to go further up, especially due to the geopolitics involving Iranian oil that is obviously creating a shortage of oil in the market,” said Jaijit Bhattarcharya, Partner, KPMG.
Petrol prices hit lifetime high when the Rs 90 a litre mark was breached in Maharashtra on Tuesday.
“With crude prices going up both in dollar and rupee terms, it is really hitting the masses. Should the government take a hit, possibly that’s what the government needs to do because there is a component of excise duty, there is a component of VAT at the state level and there are other components that add to the cost of fuel. For prices to come down now, the government probably has to take Rs 30,000 crore hit. Given the fact that people are really starting to feel the pinch and maybe use the future depreciation of crude prices as a buffer against which they can spend now,” added Bhattacharya.
India is currently the dual problem of constantly depreciating rupee as well. The burgeoning problem of currency is coupled with India’s current-account deficit at a five-year high, elevated oil prices and an emerging-market sell-off. This has resulted in rupee becoming the worst performing currency in Asia, registering a fall of almost 9 percent starting March this year.
However, all is not grim for the Indian currency.
“The rupee has been depreciating since March this year but if you look at the end of August, all other currencies starting from the Russian rouble to even the Japanese yen, the South African currency and the Mexican currency they have all had double digit depreciation against the US Dollar. So rupee has still been doing relatively well,” said Bhattacharya.
At this time of economic turmoil, pressure on the Reserve Bank of India (RBI) to take stringent action is multiplying by the day. The Centre has written to the central bank seeking “aggressive steps” for curbing rates. The RBI has already raised interest rates twice since June and depleted billions of dollars to bolster the currency, but with little success.
Problems for the rupee are far from over. Soon-to-be-released trade data is likely to portray further widening gap in its trade deficit. The US Federal Reserve is also expected to hike interest rates this month. Due to reasons such as these, DBS Bank Ltd. is predicting the currency will weaken as low as 75 per dollar.
“The immediate step that the government and the RBI can do is to step in and use the reserves and buy out rupee from the market but when one does that, can the government really hold on for long will be a question. The Central Bank had come out with a policy long time back that it will not directly step in to manipulate the value of rupee, it can only control variation around the currency that can ease its value," said Bhattacharya.
He added that it is impossible for the RBI to keep pumping in money and hold the value of rupee. “The only way out is to bring down excise duty and reduce VAT at the state levels," Bhattacharya added.