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Rupee may slide to 55 against dollar by March 2012

Industry body ASSOCHAM said that amid rising oil import bill and external debt, the rupee dollar exchange rate could well reach the levels of 53.80 by January next year and 55.10 by March if the global economy continues to be bleak like in recent months.

If the Eurozone and the United States start showing signs of recovery and foreign funds start flowing back to India, the exchange rate will settle around the new normal level of 49.50.

The rupee started tumbling after the downgrading of US credit ranking and increasing threat perception of Greece defaulting on sovereign debt. It slid against the dollar from 44.40 in July to 45.50 in August, 47.60 in September, 49.30 in October and 52.70 this month.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its latest study titled ‘Exchange Rate Slide - What Impact is it Having? Said that it could further slip to 53.10 in December, 53.80 in January 2011, 54.50 in February and 55.10 in March

Mr DS Rawat secretary general of ASSOCHAM said that “Such wild fluctuations within a short span of time are unsettling and leaving imprint on rest of the economy. The depreciating rupee will add further pressure on the overall domestic inflation.”

Since India is structurally an import intensive country as reflected in high and persistent current account deficits month after month, domestic costs will rise. The rupee depreciation will particularly hit industrial sector and put higher pressure on costs as items like oil, imported coal, metals and minerals, imported intermediate products are getting affected.

Despite Brent crude oil price coming down from 118.46 dollars per barrel in April to 109.03 dollars in November, there has been increase in import price to the extent of INR 489.80 per barrel as the rupee came down from 44.40 to 52.70 to a dollar.

A falling rupee has also impacted cost of borrowing for the corporate sector. Indian companies raised 29 billion dollars this calendar year through external commercial borrowings and foreign currency convertible bonds. Mr Rawat said that “If current valuations persist, they will end up paying five billion dollars more.”

India’s external debt is dominated by dollar to the extent of 54.2%. The rupee depreciation by 16.54% between April and November is bound to increase interest payments. Between June and November, the total external debt increase by INR 21,860 crore.

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