NEW DELHI: The rupee’s relentless decline against the US dollar has intensified chances of imported inflation as well as widening of the current account deficit (CAD). However, many economists feel India’s exporters will benefit from the currency’s fall, and arrest its impact on the country’s CAD, which anyway is not much worrisome at present.
Economists say that exporters may derive some benefits in terms of better pricing but the potential tariff imposition by the US may impact overall global trade sentiments.
“The domestic manufacturers may benefit as competition from imported goods will be less due to the depreciation factor. We don’t expect any material change to our CAD forecast of 1.3% in FY25 and FY26,” said Suman Chowdhury, chief economist, Acuite Ratings & Research. In H1 of FY25, the country’s CAD stood at 1.2% of the GDP.
Sakshi Gupta, principal economist, HDFC Bank said: “The initial impact of rupee depreciation is first felt on input prices or the wholesale inflation. The ability of producers to pass-on these prices will lead to high retail inflation, but for the next three-four months, we don’t see that happening.” Gupta expects CPI inflation to be in the range of 4-4.5% in the next three-four months, and has projected CAD at 1.2% in FY25 and at 1.4% in FY26.
Since December, the rupee has depreciated 3% against the US dollar, amidst outflows of foreign capital, moderate intervention in the forex market by Reserve Bank of India (RBI), and tariffs imposed by the US on several China-based goods.
On Monday, the Indian currency plummeted to a record low of 87.94-a-dollar, as the dollar ained strength on Trump’s plan to impose 25% tariffs on all steel and aluminium imports.
“The RBI’s policy has shifted considerably…they are more tolerant of rupee’s weakness. When there’s a lot of uncertainty in global trade, competitiveness becomes a concern,” said Dhiraj Nim, economist & FX strategist, ANZ. Nim sees rupee touching 88/$1 USD by March-end, and close to 89 by end of 2025.
According to RBI, a 5% depreciation by rupee leads to 30-35 basis points (bps) rise in retail inflation. For FY26, the RBI has estimated rupee to average 87/$1 USD, and projected CPI inflation at 4.2%.
Prashant Vasisht, senior vice president, ICRA Limited said: “With the USD-INR exchange rate rising, the crude oil import bill is expected to increase. Moreover, the prices of petchem and polymers for Indian consumers will rise as these are priced on import parity basis.”
Analysts say the imports of precious stones, petroleum products, and electronic items–comprising about 40% of the total import basket–will get expensive, and may even gradually lead to a surge in retail prices.
“If the INR continues to be over 87 to the USD, there is a material impact on the landed cost of imports,” noted Chowdhury. While retail petrol and diesel prices may not go up immediately due to absorption of the under-recoveries by the oil marketing companies (OMCs), the prices of oil and oil derivatives along with that of other imported commodities will increase for the industrial sector, increasing input costs and wholesale inflation, say analysts.
Additionally, trade experts say that the cost of imports of fertilisers is likely to see a spike, especially for DAP (diammonium phosphate) and potash, in the backdrop of continuous decline of the rupee. The budget estimate for fertiliser subsidy is Rs 1.67 lakh crore in FY26. In terms of volume, imports account for a third of domestic soil nutrients consumption of around 60 MT annually.
In the case of pulses, however, while imports surged to a record $ 3.75 billion over 6 MT in 2024 due to lower domestic production, fall in prices of rupee may not push up the cost of imports significantly. This is because the volume of imports may come down this year given the robust domestic crops harvests prospects, say experts. If the rupee continues to slide further, the impact would be significant as import contracts are signed months ahead of actual shipment, they say.
Source: The Financial Express
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