Multiple costs for economy

The depreciation of the rupee is set to inflict multiple costs on the economy. On two fronts alone - crude cost and debt servicing - the additional burden could be at least Rs 1 lakh crore, the State Bank of India (SBI) said in a research report on Thursday.

By Our Special Correspondent in Mumbai
  • Published 7.09.18
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Mumbai: The depreciation of the rupee is set to inflict multiple costs on the economy. On two fronts alone - crude cost and debt servicing - the additional burden could be at least Rs 1 lakh crore, the State Bank of India (SBI) said in a research report on Thursday.

There could be other worries as well. For instance, the RBI may be forced to raise rates which will have an adverse impact on consumption and investment expenditure. Further, with gilt yields crossing the 8-per-cent mark, the government will be staring at higher fiscal costs.

Import bill

The domestic currency has depreciated around 13 per cent this calendar year, accompanied by rising crude oil prices. With India importing around 80 per cent of its crude oil requirements, the rising prices along with the depreciation would inflate the country's oil import bill. The research report - Ecowrap - forecasts the crude import bill will come to $57 billion in the current fiscal, assuming that the country imports 0.76 billion barrels during the rest of the year. The estimate is based on an average oil price of $74.24 per barrel for the remaining half.

"If the average exchange rate remained at Rs 65.1 per dollar, the crude oil import bill would have been Rs 3,64,300 crore. However, with the rupee depreciating to an average of Rs 71.4 per dollar in the second half of 2018, the import bill will increase to Rs 4,03,600 crore, implying an extra cost of around Rs 39,300 crore," the report added.

If the average exchange rate of the rupee falls to 73 to the greenback, the extra cost will rise to Rs 45,700 crore.

Debt repayment

The rupee's depreciation can also have an impact on short-term external debt repayment of corporate India.

While India's short-term debt obligations as on December 2017 were $217.6 billion, the SBI said if half of this amount has either been paid in the first half of 2018 or is rolled over to 2019, the remaining repayment amount in rupee terms would be Rs 7.1 lakh crore at an average 2017 exchange rate of Rs 65.1 per dollar. However, for the second half, assuming that the rupee depreciates to an average value of 71.4 per dollar, the debt repayment amount would be Rs 7.8 lakh crore, implying an additional cost of Rs 67,000 crore.

However, the report forecast the domestic unit will bounce back. The SBI, which is tracking the rupee movement against the dollar since the global financial crisis, said the depreciation was always followed by appreciation.

"There were two instances where the depreciation lengthened for more than three quarters, but once the currency settled at a lower level, the appreciation picked up at a dramatic pace," it said.

We believe, this time will be no different as currency will start appreciating once the dust settles for the currency to settle at a lower level'', it added.