Washington: The Indian rupee has ‘effectively’ depreciated only 6-7 per cent this year after adjusting it to inflation, almost half of the actual drop in the value of the currency this year, the International Monetary Fund (IMF) said.
The IMF, however, warned that the rupee depreciation would jack up the prices of imported goods such as oil and petroleum products, potentially putting an upward pressure on inflation.
IMF spokesperson Gerry Rice said the currencies of many of India’s trading partners, including those in the emerging markets, too have depreciated against the dollar.
“As a result, so far this year the real effective depreciation of the Indian rupee compared to December 2017, by our estimates, is between six and seven per cent,” Rice said.
The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies, adjusted for the effects of inflation.
The Indian currency has since the beginning of the year lost almost 13 per cent in value vis a vis the US dollar. He was responding to a question on the fall of the Indian currency in the last few months.
Observing that India is a relatively closed economy, he said the contribution of the net exports to growth in April to June quarter was again stronger than expected and the real depreciation of the rupee can be expected to reinforce this trend.
“On the other hand, the depreciation will obviously raise the prices of imported goods such as oil and petroleum products, potentially putting an upward pressure on inflation,” he said.
The Reserve Bank of India has taken the rising oil import prices into the account when it raised the policy rates in its last two meetings, he noted. Referring to a recent report of the IMF on India, Rice said the Indian economy is recovering strongly from the two transitory disruptions in recent years – the Goods and Services Tax (GST) and demonetisation.
India announced the demonetisation of all Rs 500 and 1000 banknotes in November 2016 to crack down on the use of illicit and counterfeit cash. The GST was launched in July 2017.
“Growth has been gradually accelerating in recent quarters, with strength in both consumption and investment, which have helped the economy,” he said.
Noting that the first quarter growth figures were somewhat stronger than the IMF had anticipated, Rice said the world body will be reviewing its forecast for India, taking account of it and the recent global developments.
Rice said the IMF continues to assess the impact of demonetisation on an ongoing basis. As with most things, there have been pluses and there have been minuses of demonetisation, he said.
“The demonetisation did hinder the money supply, creating cash shortages, which also somewhat dampened consumer and business sentiment,” he said, adding, it resulted in relative slowdown in growth.
“On the other hand, its positive effects, I think, included enhanced digitalisation and higher formalisation of the economy, which would help raise, amongst other things, the revenue and tax compliance,” he said.
According to the IMF spokesperson, there are already some signs of its positive effects.
“The growth in the number of new taxpayers, as documented by the Ministry of Finance, has been substantial in recent years,” he said, adding it is being monitored on an ongoing basis.
(Except for the headline, this story has not been edited by The Kashmir Monitor staff and is published from a syndicated feed.)