The prospects for cut in the policy interest rates by the Reserve Bank of India (RBI) may be adversely affected by continuous pressure on rupee against dollar, firming of the US interest rates along with the hardening of the crude oil prices, an ASSOCHAM Paper on the unfolding Macro Picture noted.
“It is true that there is an ample liquidity in the banking system following demonetization 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. Besides, there are certain commodities like sugar and wheat which are witnessing firming of prices,” the Paper pointed out.
It said, the biggest risks are emanating from the unfolding global scenario marking sharp strengthening of the US dollar , raking in international money back into the American economy. Most of the Emerging Markets have witnessed huge outflows, exerting 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”.
Commenting on the situation, ASSOCHAM President Mr Sunil Kanoria said, “we are slowing 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 as 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 “.
According to the ASSOCHAM Paper while weaker rupee is good news for the Indian exporters, they would face greater competition from the peers like China, Vietnam, the Philippines and Bangladesh. “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”.
Among the domestic challenges, the play-out of the demonetization remains to be seen in terms of impact on the Gross Domestic Product while uncertainty over implementation of the Goods and Services Tax (GST) has increased.
“Thus, however much we in the industry might like to see lowering of interest rates, the macro picture may be make it a difficult proposition”, the Paper noted.