Forex reserves intact, India need not worry about rupee fluctuation: ADB

By: | Published: May 4, 2018 1:40 PM

India need not worry much about currency fluctuation at the moment as the country has good accumulation of foreign exchange reserves, but a depreciating rupee could put inflationary pressure on the economy, ADB Chief Economist Yasuyuki Sawada.

India’s foreign exchange reserves touched a life-time high of 4.864 billion in the week ended April 6

India need not worry much about currency fluctuation at the moment as the country has good accumulation of foreign exchange reserves, but a depreciating rupee could put inflationary pressure on the economy, ADB Chief Economist Yasuyuki Sawada said on Friday. He said the Asian Development Bank (ADB) does not foresee a sharp increase in oil prices which has touched $75 a barrel recently. “Foreign exchange reserves have been accumulating over time. There has been no indication of depletion of reserves so I don’t think, we need to worry much about the exchange rate fluctuation.

“Of course depreciation can be good or bad. Good news is exporting sector can gain from this depreciation of rupee. The potential negative impact is this depreciation will put inflationary pressure on the economy,” Sawada told PTI in an interview. According to reports, Indian rupee has been among the worst performing currencies in the emerging market pack this year and has lost over 4.5 percent against the US dollar. The rupee closed at 66.65 against the American currency yesterday.

India’s foreign exchange reserves touched a life-time high of  $424.864 billion in the week ended April 6, aided by increase in foreign currency assets. Sawada, however, said he does not expect any sharp increase in oil prices.

“What happens if there is sharp oil price increase? Oil importers will be adversely affected. But renewable energies are being adopted by the region. And the likeliness of sharp increase in oil prices, I don’t see this is realistic,” he said. ADB in its Asian Development Outlook last month had projected crude oil prices to remain around USD 65 a barrel in 2018 and USD 62 a barrel in 2019.

“Oil prices are determined by demand and supply. We are seeing some fluctuation in oil prices, but unless overall fundamental demand supply changes happen, we don’t see any substantial deviation from this baseline forecast,” Sawada said.

India sources about 86 per cent of crude oil, 75 per cent of natural gas and 95 per cent of LPG from Organisation of Petroleum Exporting Countries (OPEC). With India being over 80 per cent dependent on imports to meet its oil needs, a recent firming of international rates has sent domestic fuel rates higher, which in turn would impact inflation numbers. Petrol prices have hit a four-year high while diesel rates have touched an all-time high in the national capital.

With regard to the implementation of Goods and Services Tax (GST), Sawada said the new indirect tax regime would play a role in stimulating the economy as more revenues earned through it could be used for more public investments.

GST, which subsumed over a dozen local levies, was introduced on July 1, 2017, and has transformed India into a single market for seamless movement of goods. Although India is enjoying demographic dividend as of now, Sawada advocated that the government should move towards a national pension system and a universal health coverage plan to prepare itself for the ageing population.

“India still has many years to face ageing population. Ageing will slow down growth because productivity and savings will decline and working age population slows. Also, in order to take care of elderly people, the government has to spend more which has to be budgeted.

“Government should set up national pension system which takes a long time. In order to set up fully funded pension system, which is sustainable, you have to start setting up at the age of 20.

“Although Indian government has many years to counter the ageing population, the system should be set up as early as possible. National pension system, universal health coverage, should be constructed as early as possible. In this respect, securing tax and tax revenue and expanding fiscal capability is critical otherwise government cannot start this new system,” the ADB chief economist said.

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