External Pressures Pose a Challenge, says Govt.

India’s economic parameters may have withstood the early signs of a global recession, but this isn’t the time to uncork the champagne in celebration as continued interest rate hikes by the Federal Reserve could result in the Rupee depreciating further and result in exports slowing down to a crawl, says the Finance Ministry. 

In its monthly economic review for September, the ministry says external pressures from a soaring dollar, higher interest rates and costly external financing are all converging to create a new set of challenges for India’s macroeconomic stability. Therefore, in spite of India’s robust growth and management of inflation thus far in FY23, a close watch needs to be maintained. 

The note sought to allay fears of a fast depleting foreign exchange reserve as the Reserve Bank of India made repeated interventions to arrest the Rupee slide. The government said the country continued to sit on a comfortable foreign exchange pile in spite of the rapid spends to control the Rupee value against the Dollar. 

Inflation isn’t a worry at this point

It added that retail inflation has remained stable and averaged between 7.2% through the six months starting April, which puts it below the median 8% witnessed in other major economies. It added that the rise in inflation to 7.41% during September appeared to have been due to a seasonal increase in food prices. “In the absence of any further weather extremities, retail inflation is expected to trend lower in the rest of the fiscal year,” it said. 

The report also pointed out that the Dollar’s appreciation against most currencies was primarily driven by the interest rate hikes imposed by the Federal Reserve. The Rupee has thus far lost 5.4% of its value against the Dollar since April through to September, which still compares quite favorably with the 8.9% loss of six other major currencies.

Medium term growth could cross 6%

“While capital formation and digitalisation boost medium-term potential growth rate, learning losses caused by the pandemic-induced shutdowns and rising obesity levels restrain it. A healthy and educated India is a productive India,” the ministry’s note said, adding that India’s medium-term growth rate would be higher than 6%, a figure that the IMF recently came up with. 

However, the true fear in the administrative circles relates to the delayed shipments that exporters are playing around with in the hope of getting better arbitrage in the rupee-dollar trade. The Rupee had breached the 83-to-a-dollar mark last week after the RBI stopped its protection at the 82.4 levels. 

Brokerages and banks have been advising the export community to hedge less or not at all as predicting the Rupee’s normal range has become quite tough, with the only certainty that it could go further south. For now, things appear to be under control as India acquired cheaper oil from Russia to curtail the aftermath of this steep decline, given that oil trade is in dollars. 

In fact, if there is one single phenomenon that could hurt the Rupee even further, it is this trend among exporters to delay shipments awaiting for a further fall of the currency against the dollar. Expecting a windfall from currency instability is something the government needs to curb as it could potentially damage the economy in the longer run.