The depreciating rupee will result in the cost of imported petroleum, coal, electronic components and other raw material going up, apart from increasing the cost of servicing debt, said V. K. Srinivasan, Chairman, Indian Institute of Economics.
The exchange rate of the rupee has declined with respect to not only the dollar but also those of other currencies. The turbulence witnessed since June has multiple reasons, including slowing Chinese growth, political tensions in Portugal affecting the Euro, rising tension in Egypt with its impact on crude prices, and the sale by international investors in June of nearly Rs 44,000-crore worth of Indian stocks, and bonds to the tune of Rs 33,600 crore, he said.
S.K. Rao, Director-General, Administrative Staff College of India, said that the rate of inflation needs to be brought under control. It is not, however, a good idea to use monetary instruments (raising interest rates) to bring down inflation – when inflation is due to cost push factors rather than demand pull.
Such a policy can dampen investment and prevent necessary capacity building that could combat inflation. Some of the consumer price inflation is due to demand pull, but a large part of it is due to cost push associated with structural deficiencies, he explained.
They were speaking at an event organied by the Federation of Andhra Pradesh Chambers of Commerce and Industry in association with the Indian Institute of Economics on “Failing Economy and Falling Rupee.”
P. Srikanth Reddy, Chairman and Managing Director, Four Soft Ltd stated that the falling rupee causes gives a lower return to foreign investors and reduces the value of foreign investment in India.
Srinivas Ayyadevara, President, FAPCCI, in his welcome address, said that the depreciation in the rupee was creating many problems for the economy leading to high inflation, as India imports around 70 per cent of its crude oil requirement and the Government will have to pay more for it in rupee terms.