Rupee fall to widen trade gap -Credit Suisse

Enlarge Photo File photo of a girl displaying a 1000 rupee note in Mumbai. The rupee's steep...

Thu, May 15 05:08 PM

MUMBAI (Reuters) - The rupee's steep fall versus the dollar may widen its current account deficit and push inflation higher, Credit Suisse said on Thursday.

The partially convertible rupee has fallen more than 7 percent to a 13-month low this year reversing a more than 12 percent gain in 2007, with most of its decline coming this month.

At 4 p.m, the rupee was quoting at 42.55/56 per dollar.

Nilesh Jasani and Arya Sen, analysts at the Swiss brokerage, said a 1 percent fall in the rupee adds 70 billion rupees to the federal fiscal deficit as the government sells a variety of items such as oil and fertilisers at below-market prices.

"In an environment where oil, food and fertiliser deficits are nearly double those of the same time last year, the burden is costly not just for the government but for the entire economy," they wrote in a note.

India, which imports 70 percent of the fuel it consumes, caps retail prices, to soften the blow of high global prices, which hit a record of near $127 per barrel on Tuesday, on local consumers and partly compensates them by giving them bonds.

The falling rupee will add to inflation which is already running at 3-½ year highs of 7.6 percent, much above the Reserve Bank of India's (RBI) target of 5.5 percent in 2008/09, and policymakers have already taken a slew of steps to tame inflation.

It will also affect the ability of local and import-dependent companies to raise funds from the offshore markets if the local unit is seen as a weakening currency and it will tighten liquidity in the local money markets, they said.

The rupee's fall will benefit software firms if it were to stabilise around 42 per dollar, but will adversely impact sectors such as oil, cement and steel.

It will also hurt sectors such as pharmaceuticals, telecommuncations and education, which rely on foreign currency borrowing as funding costs rise, it said.

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