Rupee falls, worries rise

The falling Indian rupee against the US dollar has started pinching consumers hard. Retail inflation eased to 7.01% in June brought little relief as some Fast-moving Consumer Goods (FMCG) companies hid behind the smokescreen of 'shrinkflation' to create a false sense among retail consumers about prices not going up. As the rupee has depreciated to a historic low and inching towards the 80-mark, the rising import will trigger more inflationary pressure and continue to burn bigger holes in consumers' pockets. Major FMCG brands have downsized packets and reduced quantities to protect popular price points perceived by ordinary consumers as affordable. Adoption of the strategy of 'shrinkflation' to tide over input costs due to inflation, making consumers pay higher prices for the same quantities of commodities, indicates that the crisis is deeper than it appears. The shrinkage in the size of a biscuit packet, for instance, has become noticeable and this strategy of passing the rising input cost to consumers under the garb of keeping the unit price the same is not going to work. Increasing exports is one way of appreciating the value of the rupee and various initiatives taken by the Central government have led to a rise in exports. Preliminary data for June of India's merchandise trade released by the Ministry of Commerce show that imports rose higher in the month and a falling rupee has pushed the import bills up due to an increase in the cost of imports. The merchandise export in June increased by 16.78% to USD 37.94 billion over USD 32.49 billion in June 2021. India's merchandise export in April-June 2022-23 was USD 116.77 billion with an increase of 22.22% over USD 95.54 billion in April -June 2021-22. The value of non-petroleum exports in June 2022 was 30.12 USD billion, registering a positive growth of 5.53% over non-petroleum exports of USD 28.54 billion in June 2021. The cumulative value of non-petroleum exports in April -June 2022-23 was USD 92.49 billion, an increase of 11.92% over USD 82.65 billion in April-June 2021-22, according to an official release issued by the Ministry. Import in June 2022 was USD 63.58 billion, an increase of 51.02% over USD 42.1 billion in June 2021. Imports in April-June 2022-23 were USD 187.02 billion with an increase of 47.31% over USD 126.96 billion in April-June 2021-22. The trade deficit in June increased to USD 25.63 billion over USD 9.61 billion in June 2021. The total deficit during April-June 2022 was USD 70.25 over USD 31.42 during April- June 2021 which reflects the widening trade deficit, and it being the largest component of the Current Account Deficit (CAD), is also pushing up the latter. Foreign investors withdrawing more money from Indian equities has also contributed to the rupee falling against the dollar. It is the import value of petroleum has almost doubled due to the rise in crude oil prices triggered by the Russia-Ukraine conflict. The rise in crude price beyond the USD 100-mark causes a spike in dollar demand impacting rupee demand to slide against the strong dollar. The Reserve Bank of India (RBI)'s latest move of allowing international trade settlement in rupees and exchange rates to be determined by trading partners at market-determined rate will facilitate trade in rupee between India and countries like Russia, Iran, according to experts, will help save dollars that are currently used for payment for importing petroleum and other commodities and will check depreciation of the rupee. RBI says that Indian importers undertaking imports through this mechanism shall make payment in the rupee which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier. Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in rupee from the balances in the designated Special Vostro account of the correspondent bank of the partner country. The impact of this mechanism in stemming the rupee's fall will be known only after it is put fully into operation and trading partners mutually decide the market-determined exchange rates. International crude oil prices falling and staying below the USD 100-dollar mark has sparked recession apprehension but falling crude prices will cut down India's import bill which will help the rupee to appreciate against the dollar and inflation will also ease further. The retail inflation rate of 7.01% in June continues to breach the RBI's tolerance limit of 6% and if the rupee continues to hover around a historic low the RBI is likely to resort to another interest rate hike in its August Monetary Policy Committee meeting to bring down inflation within the threshold limit. The central and state governments taking steps to moderate food and other essential commodity prices, raise household income, and create livelihood avenues have become necessary to shield ordinary consumers from inflation shocks and economic recession.