The Associated Chambers of Commerce & Industry of India (Assocham) in its latest report has said that the interest rates cut prospects in the near future by the Reserve Bank of India (RBI) may be adversely affected due to factors such as continuous pressure on rupee against dollar, firming of the US interest rates and hardening of the crude oil prices.
The report further pointed out that even though there is a sufficient liquidity in the banking system after demonetization and lowering of inflation both at the WPI and CPI levels, this cannot be regarded as a normal situation. It also noted that once the scrapped Rs 500 and Rs 1000 notes are exchanged and fresh currency is injected back into the banking system fully, the ball game would change. Besides, there are certain commodities like sugar and wheat which are witnessing firming of prices.
As per the Assocham, the biggest risks are deriving from the unfolding global scenario marking sharp firming of the U.S. dollar and raking in international money back into the US economy. It added that most of the emerging markets have witnessed huge outflows, exerting pressure on their currencies. India may get consolation from the fact that it will be less affected as it is amongst the largest crude oil importers in the world and net importing country. Therefore, the dollar strengthening has a direct and immediate impact on the country’s overall balance of payment position and would lead to inflation in the medium term.
According to the report, while rupee depreciation is good news for the Indian exporters, they would face greater competition from the peers like China, Vietnam, the Philippines and Bangladesh. The Chinese currency is melting against dollar and helping its exporters in the process. The report also noted that the play-out of the November 8 demonetisation measure remains to be seen in terms of impact on the Gross Domestic Product (GDP), while uncertainty over implementation of the Goods and Services Tax (GST) has increased.