Rupee slide impacted export-import, inflation differently across periods

There are several reasons for the lack of uniformity, such as depreciation of other currencies, essential nature of crude imports and global fluctuations in energy prices

There are fears that the rupee may fall below 80 to the dollar due to the ongoing Russia-Ukraine war if RBI does not intervene aggressively and the conflict drags on. How will the slide impact exports, imports and inflation, more particularly the spike in the prices of imported goods?  

The four major bouts of rupee depreciation in over a decade--2013-14, 2015-16, 2018-19 and 2020-21--impacted these heads differently in each of these periods.    

Exports rose by about 5 per cent in 2013-14 but imports dipped 8.3 per cent when the rupee shed over 11 per cent year-on-year.

The impact of imported inflation falls mainly on WPI inflation of fuels and manufactured items. While WPI in fuel and power rose seven per cent, that of manufactured items was up just three per cent.

The rupee lost seven per cent in 2015-16. All the four heads declined YoY--exports, imports, WPI fuel and power inflation and WPI inflation in manufactured goods.

The rupee shed almost 8.5 per cent to the dollar in 2018-19. That was the only year among the four cited above which saw exports, imports and inflation increase. Exports rose 8.75 per cent, imports 10 per cent, WPI inflation in fuel and power by 11.5 per cent. However, WPI inflation in manufactured goods even then rose by just 3.6 per cent.

The year 2020-21 was a period of slackening demand, hit by the first wave of Covid. So though the rupee depreciated by almost five per cent, both exports and imports dipped. Also, while fuel and power inflation in WPI terms fell, manufactured products rose by just 2.7 per cent.

Decoding the difference in behaviour

Why did the depreciating rupee impact these four heads differently? As far as its effect on the exports is concerned, depreciation of currencies of competing nations against the dollar is a major factor, along with elasticity of demand for India's products in importing countries.  

Imports should generally decline as the rupee loses value if demand is elastic. However, much of India's imports are essential items such as petroleum products, whose consumption does not decline all of a sudden. Also, global crude prices even in dollar terms keep fluctuating and impacted its import in value terms.

In 2013-14, global rates of the Indian crude basket moderated, but still remained elevated at $105.52 a barrel on average, against $107.97 the previous year. As such, imports of petroleum rose just 0.46 per cent, not allowing a surge in overall imports. However, since crude prices remained high, the impact on inflation was still felt.

In 2015-16, international prices of Indian oil basket declined significantly to $47.17 a barrel from $84.16 a year ago. This explains why the import bill on petroleum plunged by 40 per cent to $82.94. The development significantly impacted overall imports and led to a sharp decline as cited above. It also led to a huge fall in WPI fuel and power inflation, which declined by almost 20 per cent. However, impact on WPI manufactured item imports were minimal.

In 2018-19, the global rates of Indian oil basket rose to $69.88 billion a barrel from $56.43 billion, causing a spike in petroleum imports by 29.69 per cent to $140.92 billion. This led to a rise in overall import bill by over 10 per cent and WPI inflation in fuel and power by over 11 per cent. WPI manufactured products, however, rose just 3.6 per cent.

As cited above, the muted demand led to fall in all four metrics as the rupee dropped in 2020-21, albeit at the slowest rate of 4.75 per cent compared to the other three periods. Also, the huge fall of international rates of the Indian oil basket to $44.82 a barrel from $60.47 in the previous year helped.

The situation in 2022-23 may see the rupee depreciate further, accompanied by a rise in the global rates of Indian basket, depending on how long the Russia-Ukraine war lasts. The rupee dipped almost four per cent to 76.47 per dollar on February 24 against 73.61 in the previous day, when Russia invaded Ukraine. After much volatility, it still remained at 76.47 by March 15.

Global prices of Indian oil basket had already touched $108.70 a barrel by February against $97.09 the previous month.  India imported $15.28 billion of petroleum in February, 27.76 per cent higher than $11.96 billion the previous month, despite the former being three days shorter. The impact on petroleum exports was also visible as these rose to $4.65 billion in February, 11.5 per cent higher than $4.17 billion in the previous month.

Overall imports rose slightly higher to $55.45 billion in February against $51.93 billion in the previous month, while overall exports remained almost the same at $34.57 billion in February against $34.50 billion in the previous month. High fuel prices have not so far impacted WPI inflation. However, WPI inflation in manufactured items did rise to 9.84 per cent in March from 9.42 per cent in the previous month. However, it was still less than 10.71 per cent in January.

Icra chief economist Aditi Nayar says a weaker rupee is likely to compress import volumes, especially because higher energy prices will squeeze disposable income. But elevated commodity prices would boost exports by value, she says.  

The transmission of higher commodity prices into the WPI inflation tends to be considerable and rapid, whereas the prices of final goods may adjust at a slower pace, she further adds.

Nayar says the volatility in crude oil prices will dictate the trend in the rupee , which has been among the weaker emerging market currencies since the crisis started, given the preponderance of energy imports as well as large FII outflows.

"We expect the rupee to trade in a range of 76-79 to the dollar in the duration of the conflict, with an easing to 74-77/$ after the conflict ends, and normalising global sentiments spur renewed FII inflows," she says.  

Given the substantial forex reserves in excess of 12 months of trailing 12 month imports, she does not foresee a disorderly depreciation in the rupee, going ahead.