Fears of weaker rupee, higher inflation worsen

Earlier this month, the government unveiled its National Logistics Policy aiming to reduce the logistics costs by 5-6 per cent from an estimated 13-14 per cent of GDP. It also took some measures of interest to the exporters and importers. Yet, all these initiatives were overshadowed by worrying developments abroad.  
 
The Commerce Ministry allowed invoicing, receipts, and payments in rupees through Special Vostro Accounts (SVA) for trade transactions in sync with the instructions of Reserve Bank of India (RBI) on July 11, but refrained from saying whether exporters will receive incentives such as duty drawback against receipt of payments through SVA for their exports. It allowed export of broken rice till this month-end and import of PET flakes under licensing subject to fulfilment of prescribed conditions. The Director General of Foreign Trade (DGFT) amended the procedures for imports under Tariff Rate Quota and the documentation requirements for supplies from Domestic Tariff Area (DTA) to Export Oriented Units (EOU).

 
The Finance Ministry increased the validity of electronic duty credit scrips under various schemes to 24 months, giving more flexibility to exporters. It also amended the notifications relating to Rebate of State & Central Taxes and Levies (RoSCTL) and Remission of Duties and Taxes on Export Products removing the provisions to proceed against transferees of the duty credit scrips for wrongdoings of exporters who obtained the scrips from the government. The Central Board of Indirect Taxes and Customs (CBIC) issued circulars for transit of containerised cargo from Bangladesh through river and land routes for export to third countries and also export of cargo from Inland Cont­ainer Depots to Bangladesh via waterways. The CBIC also explained the changes brought about through Customs (Import of Goods at Concessional Rate of Duty for Specified End Use) Rules, 2022 that mainly expand the scope of application of the superseded 2017 Rules, without altering its basic features.

 

However, Russia’s partial military mobilisation and the referendum on joining Russia in four provinces of Ukraine grabbed the global attention, as they implied that the war in Ukraine will not end anytime soon and that Europe will have a hard winter without Russian oil and gas. It also meant substantial diversion of resources to war efforts in the western countries.
 
Steep interest rate hikes and quantitative tightening in many economies and the hawkish stance of the Federal Reserve in the US exacerbated the fears of recession in the coming months. The uncertainty led to flow of money to safe havens in the US, causing the dollar index to hit record levels in two decades. Consequently, the currencies of most countries depreciated against the US dollar. Indian rupee closed at a record low of 80.99 to a US dollar on Friday, worsening fears of inflation.

 
The RBI has already sucked out surplus liquidity in the system by selling foreign currency to curb excessive volatility in the foreign exchange markets. In the context of greater depreciation of currencies in the competing economies, it might be better to let the rupee depreciate in the short run and resort to a bond-buying programme to ensure enough liquidity and credit flow to meet the demands of consumers and businesses in the festive season. So, exporters and importers must prepare for a weaker rupee and higher inflation, at least in the short run.

email: tncrajagopalan@gmail.com