Rupee slips below 60 against dollar, inflation is the worry

Mumbai, June 26: The rupee hit another record low on Wednesday and slipped the psychological resistance level of 60 against a dollar, due to high month-end demands for the US currency by importers and sustained outflow of money.

The partially convertible rupee slumped to 60.63 against a dollar at the inter-bank foreign exchange market in Mumbai in the late afternoon session, surpassing its previous record low of 59.98 hit on June 20.

Rupee had closed at 59.67 against a dollar on Tuesday.

What next? Curbs on gold sales?

The intervention by the Reserve Bank of India can help curb sharp depreciation but the impact is only expected to be temporary.

Given the current economic dynamics, there is no likelihood of the RBI lowering interest rates.

The RBI may also restrict gold supply and demand indicate that the scenario is extremely challenging and these measures on gold sales may come as early as July 1.

This is expected to curb investment demand for gold. However, crude oil imports account for a major portion to overall commodity imports in India and this may persist for some time.

Analysts expect rupee to slide to 62 a dollar and could further weaken to levels around 64.

How it will effect people?

India will pay more for imported products. Oil being first on the list. It will be expensive to buy in international market and the government will pass the burden to the end consumer like fuel prices (petrol, diesel, LPG). This will have cascading effect on the consumer market leading to inflation.

If it does not pass on the increase in prices to the end consumer then the government will run a higher fiscal deficit, forcing the government to borrow and it will affect interest rates.

Coal is next big thing. India imports a lot of coal, used for the production of power. With the rupee losing value against the dollar the cost of importing coal will go up. This week the government cleared a proposal to pass the coal import bill to the consumer.