Mumbai/New Delhi/Bangalore: The rupee breached the 43 level to touch 43.20 to a dollar, a 13-month low, in early trade on Thursday even as crude oil traded at around $135 (Rs5,800) a barrel in Asian markets. The dollar closed at Rs42.97 after banks started selling dollars.
The rise of the greenback, which depreciated against the rupee all through 2007, is good news for the IT industry, pharma firms and other exporters. but it will likely deal a blow to India’s fight against inflation.
Most IT firms here earn in dollars and many pharmaceutical firms depend heavily on exports to the US and Europe. A depreciating rupee props up earnings of such companies.
At the same time, it also increases the cost of import in rupee terms. A strong currency helps control inflation as importers pay less for their imports. India is the 10th largest importer of oil, and it imports 70% of its crude oil requirement. For the week ended 3 May, inflation, as measured by the rise in the wholesale price index, rose to a 44-month high of 7.83%.
The weakening rupee combined with the rising price of crude will drive up inflation, interest rates and eventually affect economic growth, according to some economists. “The risk to growth is definitely there from the current inflation surge, which comes on top of the weakening global demand and financial market turbulence,” said Sonal Varma, the Mumbai-based India economist of Lehman Brothers.
Foreign exchange dealers blame rising crude prices and slowing inflows of foreign funds into the country for the weakening local currency. Price of crude oil in India’s energy basket crossed $125 a barrel even as international crude oil (Nymex) was trading at $135 per barrel on Thursday.
According to some foreign exchange dealers, foreign investors are selling local stocks to meet demand for dollars back home and also because, at least for the short term, they have turned pessimistic on returns from investments in the stock market in India.
Sensex, the benchmark index of Bombay Stock Exchange, lost 336.05, or 1.95%, to close at 16,907.11. In the last one week, Sensex has lost 2.57%. Foreign institutional investors, or FIIs, who were net buyers of about $17.36 billion of Indian equities last year, have turned net sellers this year. They have sold $2.78 billion worth of Indian equities since January, net of buying.
After appreciating 12.3% in 2007, the local currency has slipped more than 8.5% this year, making it the second worst performer among the 11 most-traded Asian currencies after the South Korean won. The rupee was trading at 39.41/42 on 1 January. It even rose to 39.26/27 to a dollar in mid-January.