| Falling rupee, dearer oil |
The rupee touched its lowest level against the US dollar at 46.36 on September 19th, falling 37 paise in a single day. With this the rupee depreciated by 6.3% since the beginning of fiscal 2000. However it recovered on 21st as banks were directed to sell their dollar reserves in the local market.
The rising crude oil prices, which touched a 10-year high (at $36 per barrel), is the main reason behind the fall of the rupee. There was wide spread fear that the balance of payments position of India would be adversely affected as the expected import oil bill rose to $17 billion. The forex reserves with the RBI fell by US $ 264 million. Despite RBI expressing confidence that it could meet the public sector oil bills from its reserves, corporates and importers resorted to heavy dollar buying. Apart from the oil prices, the decreasing dollar inflows from foreign direct and institutional investors also affected the rupee. The declining dollar supplies along with the rising demand exerted pressure on the rupee, leading to its depreciation.
The Central Bank intervened to stem the fall of the rupee by directing a few foreign and state-owned banks to sell their dollar stocks in the local market. Many banks have been building up dollar positions for future sales, expecting a further depreciation in the rupee. With the banks unwinding their long positions, the rupee gained 13 paise against the dollar to close at 46.23 on September 21st. The value of the rupee has since been relatively stable in that range.
However the rupee was not alone in its fall. Stock markets across the globe were adversely affected anticipating a further increase in the oil prices. The Euro plunged against the dollar amidst fears that the oil price increase would be detrimental to the Eurozone economy. The Japanese Yen and the Australian Dollar also fell against the dollar. South Asian currencies including the Indonesia Rupaiah, Pakistani Rupee, Nepali rupee and the Thai Baht suffered losses. Hence it is evident that most of the economies across the globe will be faced with inflation due to the oil crisis.
Soon the Indian government will have to choose between raising the domestic prices of petroleum products or run deeper into debt. The result of either of these options is bound to be inflationary. Looking at it as a global phenomenon, any local measure taken up by the RBI, may not prove effective.
Sreelaxmi