In less than three months US dollar to go below Rs. 50

26 September, 2012

Dollar is likely to drop below Rs 50 in less than three months and stabilize at that level on the back of a host of policy reforms, return of FIIs into the Indian stock market and weakening of the US Greenback against major currencies of the world. The industry body Assocham has made this forecast in a study.

AFTER RISING 25 per cent in the last one year, the dollar has already been witnessing a sharp correction in the last two weeks after global investors turned back to India following the government’s determination to push ahead with the reforms. At present, rupee is trading at around 53 to a US dollar.

The most immediate gain from easing of dollar against rupee would be a sharp reduction in the landed price of the crude oil and the raw gold. These two items are the largest in the country’s import basket and big gains on the country’s current account deficit. Besides other imports such as pulses, edible oil would also see easing of pressure.

“To the extent, rupee gains, our infamous imported inflation would also come down,” the Assocham President said, stressing the need for keeping the reforms momentum intact. India meets about 80 per cent of its crude oil requirements from imports and its gold imports last year were USD 60 billion.

If the trend of dollar depreciation continues and there is some downward movement in the international crude prices, there could be a pleasant surprise in terms of the oil marketing companies even reducing the fuel prices, the study report said.

The projection of rupee gaining again is based on several factors combining into one big positive for the Indian economy. These factors are: reduction in merchandise imports, upbeat mood among those who want to bring in foreign direct investment, release of funds from the dollar assets in the global markets and the foreign institutional investors betting again on the Indian equity. After a kind of lull, the FIIs are seen active in September pushing the Sensex.

While exports have fallen in the backdrop of slowdown in the western economies, imports too have dropped due to slowdown in the domestic demand. So is the demand for gold. After record imports of USD 60 billion, gold imports are expected to show a considerable decline.

The April-August period of the current period has seen a lower trade deficit of USD 71 billion against USD 76 billion in the comparable period of the last financial year. The F.Y 2013 as a whole may see a much lower trade gap than USD 185 billion in 2011-12.

The study said that while depreciation of dollar may not be appear to be a good news for exporters of goods and services, it augurs well even for these areas since a strong rupee would also mean reduction in cost of raw material and manpower.

“To that extent, our exports would become competitive. Reduction in raw material cost has a huge bearing on the final cost of the shipments, especially in the case of manufactured exports. Bulk of India’s merchandise exports are manufactured goods such as engineering, gems and jewellery, petroleum products, textiles etc,” the study said.