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Depreciating rupee to push up prices of manufactured items

21 May 2012 Evaluate

Depreciating rupee will push up the prices of manufactured items in the country. A 5% depreciation is expected to push up prices by 15-20 basis points adding to the anguish of the common man. This is because as the rupee depreciates it will make the cost of imports costlier for the country especially of crude oil. This will increase the input cost for producers and hence the price of the output.

It has been suggested that the RBI should intervene by increasing the supply of the dollars so that the falling rupee can be supported at its fair value. Also a special window may be opened for oil companies from where they can directly buy dollars to make payments for their imports.

The rupee has been depreciating to record levels against the dollar due to a rise in its demand from oil companies. The rising prices of crude oil have increased the demand for dollars. This has also prompted the Finance Minister to ask C Rangarajan, chairman of the Prime Minister's Economic Advisory Council (PMEAC) to suggest ways to reduce import of crude oil. 

Concerns are also being expressed over the rising Current Account Deficit (CAD), which has shot up to 4% of the GDP in 2011-12 from the 2.7% a year ago. The oil import bill amounted to a whopping $145 billion during 2011-12, out of the total $485 billion of imports.

Inflation has also been stubbornly high in the past fiscal year. In the month of April 2012, the Wholesale Price Index went up to 7.23% whereas the Consumer Price Index (CPI) shot up to the double digit mark at 10.36%.

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