New Delhi, March 24: The BJP-led central government favours letting the rupee, which has hit a record high in two days of trading, appreciate to take care of the country’s rapidly rising import bill.
As a bonus, the sharp rise in rupee value will also keep inflation at bay, a fact sure to help the government as it prepares to go to the polls next month.
“We are not against the rupee’s rise as this helps reduce the rapidly increasing import bill in domestic currency terms. All that we and the RBI are concerned about is any sharp volatility in the money market,” said a finance ministry official.
North Block has been in constant touch with the Reserve Bank on the rupee which yesterday breached the Rs 45-to-the-dollar mark, nearly 9 per cent below the lowest value reached last year.
The thinking is reflected in the RBI’s lack of enthusiasm till now in checking the appreciation of the currency. The central bank often intervenes, though unofficially, in the money market through a clutch of state-run banks, but in recent times, it has not been doing so and these banks led by the State Bank of India have undertaken very few dollar deals.
Analysts say the rupee has been appreciating because of strong inflows into the local stock market and strong foreign funding coming in through unofficial channels for political parties contesting the elections.
“We feel the rise may hit exports somewhat, but it will mean our import bill, which has risen an unprecedented 24.9 per cent, will be deflated by that much (9 per cent) in domestic value terms. As a bigger bonus, it means inflationary trends which we have been noticing will remain curbed,” said a senior official. In the past five years, India’s imports have gone up between 1.7 per cent and 14.5 per cent.
In April-December, the country’s import bill stood at $55.05 billion and resulted in a bloated trade deficit of $12.62 billion, nearly 40 per cent higher than the trade deficit of 2002-03. Oil imports alone accounted for 27 per cent of this bill and oil prices have since risen sharply to stand at a 14-year high.
“But forward contracts (which allows Indian importers to book imports at a fixed dollar rate almost a year in advance) and the appreciating rupee means we still don’t lose out much,” said an official, explaining the policy behind soft pedalling on the rupee rise.
However, officials made it clear that intervention would come “whenever the rupee rise or fall is too sharp for the markets to digest”.
The rise has certainly helped keep inflationary pressures at bay, admit North Block officials. Weekly data released last Friday showed inflation falling to 4.91 per cent, well below the 6.21 per cent peak in January.
Besides the strong inflows (a record $7.8 billion in 2003) coming in to shore up the rupee, the dollar itself has been under trading attack in international currency markets because of a variety of reasons.