Time to seriously worry about falling rupee & twin deficits: Mythili Bhusnurmath

"Ironically, we have seen a month on month sequential decline in exports which is very worrisome because just last fiscal, we are celebrating the fact that Indian exports had overshot that $400 billion mark and we thought Indian exports were stated for a straight upward trajectory. Clearly that is not the case," says Mythili Bhusnurmath, Consulting Editor, ET Now


The high commodity prices and the weaker rupee are making our imports more expensive while the exports engine is declining. Should we be worried more because of the high import bill or that we are not able to grow our exports fast enough?
It is a combination of both. Even though the rupee has depreciated by about 7% since the beginning of the year, we have seen a slight recovery in recent days. When globally demand slows, there is only that much that the weaker rupee can do in terms of growth in exports.


On the one hand, we have exports growing more slowly because of slower global demand and at the same time, because of high commodity prices and the weakening of the rupee vis-à-vis the dollar, we are seeing the import bill rise and hence the widening trade deficit.

In fact, this is exceedingly worrisome because the high trade deficit almost automatically leads to a high current account deficit. We are likely to end the year at a little over 3% and that is considering the absolute danger mark. All this time, our external sector was in good health. But now we are seeing weakness on the external front as well and that is going to put additional pressure on the rupee and this is worrisome, not perhaps so much because of the level of the rupee but what it means in terms of inflation.

At a time when inflation is already very high, a widening trade deficit and widening current account deficit means a weaker rupee and further pressure on inflation. So, there are worries on many fronts.

Has the hiking of the import duty on gold helped lower the big chunk of our import bill in general since commodity prices have been trending lower? That includes gold and oil and even silver is down by Rs 500 today at Rs 57,500 odd per kilogram. How much will lower commodity prices help reduce the widening trade deficit going ahead?
The widening of the trade deficit is accounted for by oil imports and the latest numbers of gold imports have come down a little bit. It is not so much gold, but it is non-oil and non-gold imports which are growing precisely because the Indian economy does seem to be recovering and there is a huge demand particularly for electronics.

If you look at the disaggregated numbers of imports, you will find electronics imports have really shot up. Is this a combination of high oil prices and high non-gold demand import demand for other items because the Indian economy is recovering and that has accounted for the sharp increase in imports.

Ironically, we have seen a month on month sequential decline in exports which is very worrisome because just last fiscal, we are celebrating the fact that Indian exports had overshot that $400 billion mark and we thought Indian exports were stated for a straight upward trajectory. Clearly that is not the case.

Europe almost definitely will go into recession. We could argue that the US is not yet in recession given their employment numbers but the fact is global demand is slowing and so yes services export should help us. We are seeing the IT industry do well but if the global economy flails, even for services exports the outlook is not too bright.

Overall, we need to worry about the fact that our trade deficit is widening though we have seen a recent return of foreign institutional investors. But the fact is as the dollar strengthens, we will see a rush to safe haven shores as a result of which, financing of that current account deficit also becomes problematic. We really need to worry about the weakening of the external front.

How much more pressure do you reckon the rising trade deficit is going to put on an already declining rupee?
It is hard to comment about the currency because it is a months’ game to try and guess where the currency will finally end, particularly since the weakness in the rupee has been driven largely by the strengthening of the dollar. The US economy is technically in recession because there has been a contraction in GDP for two consecutive quarters.

The US economy does not fulfil the other requirements that qualify it to be said that it is in recession. Employment is very good, demand is quite strong and so it is really difficult to categorise it as a recession. So, as the dollar strengthens, we will see the rupee weaken. Yes, there has been a temporary reversal of the rupees weakening primarily because of the return of FPIs and also because of the RBI’s intervention but whether this will be sustained is very difficult to say, particularly if our trade deficit and our current account deficit worsen. In that case, the rupee will weaken further and the bigger worry from a weakening rupee is what it means in terms of imported inflation and overall inflation. So I would not relax our guard at all on the external front, in fact I would start beginning to worry very seriously about it.