Considering higher domestic inflation as supply disruptions mount, it will not do any harm for RBI to lean with the wind and let the rupee appreciate, as it can lead to reduced imported inflation when metal and oil prices are rising, and clear the liquidity overhang to some extent, according to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

"With CAD [current account deficit] at a comfortable situation and an extremely unlikely devastating third Covid (wave), the Indian rupee is going to handle any taper news with relative calm," Ghosh said in the latest edition of SBI's Ecowrap report.

"If we look at the current rupee trajectory, the rupee saw a tumultuous 2020, with the news of Covid-19 pushing the exchange rate down rapidly. However, it started gaining strength as India saw a current account surplus and foreign investors maintained faith in the economy by pouring in capital. RBI has continuously made forex purchases. In FY21, RBI purchased Rs 5.1 trillion worth of forex and its forex reserves swelled by $103.72 billion. Despite the second wave of Covid-19, the rupee gained strength and even went below 73 per dollar," Ghosh added.

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However, recently, the Indian unit has dropped from 73.09 per dollar as on September 1 to a low of 75.52 per dollar on October 12. It has again started appreciating and is currently at around 75. If we look at the turnover in the forex market, there has been excess supply of dollars at $2.2 billion in August 2021. This clearly shows that the appreciating bias on rupee remains.

The September 2021 merchandise trade deficit at $22.59 billion is quite high and has the closest counterpart in October 2012, when India recorded a merchandise trade deficit of $20.21 billion. But it needs to be remembered that trade data shows seasonality and it is fairly common to see a jump in imports as well as exports every quarter end month, Ghosh said.

So far, India’s exports have been doing quite well. India’s merchandise exports in April-September 2021 were $197.9 billion, a robust increase of 24.3 per cent over $159.2 billion in April-September 2019. In composition terms, engineering goods are the most valued. India has also seen considerable increase in products such as cereal preparations, cotton, electronics. drugs and pharma and chemicals are also performing well.

"Thus, achieving the target of $400 billion is not a pipe dream and this will provide a strong cushion to the current account balance, even if the oil import bills rise rapidly. Taking everything into account, our CAD projections stand at (-)1.4 per cent. India is also witnessing robust FDI inflows, even if the FPI flows are showing some volatility," Ghosh added.

 

 

 

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