India’s commodities import bill likely to increase

India’s commodities import bill likely to increase

By SHAILENDRA TYAGI | NEW DELHI | 6 December, 2015
The Eccles Building, Washington, houses the main offices of the Board of Governors of the Federal Reserve System. PHOTO: Wikipedia

India, being a commodities importing country, is likely to see its imports bills getting dearer on Federal Reserves’ probable move to hike interest rates in America. The Fed’s move is likely to depreciate the rupee that would in turn make all dollar denominated commodities — like crude oil and gold — costly in rupee terms. India has been a huge importer of gold, crude oil, steel and edible oil. However, the depressed global prices of commodities might limit the impact on India’s import bills. America’s Central Bank is meeting on 15-16 December to decide the timing and the quantum of the much-anticipated rate hike. Murthy Nagarajan, head-fixed income at Quantum Asset Management Company feels that “the Federal Reserve is very likely to hike interest rates as early as mid of this (December 2015) month itself.” He adds that although this rate hike is not going to impact the rupee much since most of the impact has already been absorbed by the markets but “if the Fed’s tone and tenor, towards further rate hikes, is hawkish then the rupee might depreciate significantly thereby making India’s imports even more costlier.”
Nagarajan, however, expects the Fed’s tone to be dovish and sees strong chances of further hikes to be gradual. Analysts feel that the Fed’s gradual approach would give time to emerging market currencies to get stable. “It is a widely anticipated event for markets all across the globe and emerging markets like India have been preparing itself to guard against the possible impact of rate hikes in the US,” says U.R. Bhat, MD at Dalton Capital Advisors. In a way, the Fed has given about eighteen months prior notice to all concerned before hiking interest rates in mid-December this year. The rupee has already weakened about 3% in last three months. So, some bit of rupee depreciation is surely expected but the US withdrawal of cheap money policy is going to get replaced by the European Central Bank (ECB) providing further stimulus to boost Euro zone’s growth. Given India’s improving economic credentials, some part of European stimulus would flow into India, thereby strengthening the rupee.
India imports about 900 tonnes of gold and about 4 million barrels of crude oil annually by paying for them in hard earned American dollars. Although crude is an essential import, the government has imposed a hefty import duty on gold to discourage its lavish imports. But given India’s penchant for the yellow metal, the government’s move is fast losing its efficacy. In the ongoing wedding season, which would last till February next year, India is going to create its required demand for gold imports.
 

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