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Economy

Rupee's fall and costly crude take toll on Indian economy

Record fuel prices spur public anger at Modi government ahead of election

Supporters of an opposition party in India block a railway track during a protest against record high petrol and diesel prices in Mumbai on Sept. 10.   © Reuters

MUMBAI/NEW DELHI -- The rupee's slide to new lows and high crude oil prices are reverberating throughout India's economy -- bad news for Prime Minister Narendra Modi's government as a general election looms in the spring.

The rupee sank as far as 72.9 against the dollar at one point on Wednesday, beyond the record low marked just the day before. Factors including the U.S. Federal Reserve's rate hikes have dragged down the Indian currency this year. This has in turn driven up energy costs, including for crude oil, of which India is a net importer.

The rupee's weakness may cloud the outlook for India's economic growth, which accelerated to 8.2% on the year in the April-June quarter. It is also weighing on the country's trade balance. The current-account deficit widened to $15.8 billion last quarter, or 2.4% of gross domestic product -- up from 1.9% in the January-March quarter -- putting further downward pressure on the currency.

The soft currency is contributing to inflation as well. The consumer price index climbed 5% on the year in June, government data shows. Though price growth slowed to 4.2% in July and 3.7% in August, it could pick up again.

The Reserve Bank of India raised the policy interest rate by 50 basis points to 6.5% between June and August in an effort to rein in inflation, and it has made clear that it is prepared to defend the rupee.

Higher materials costs spurred many automakers to raise prices last month. Maruti Suzuki India, the country's largest carmaker, announced hikes running as high as 6,100 rupees ($84.50), or about 1%. Homegrown players Tata Motors and Mahindra & Mahindra lifted prices by around 2%.

This could dent passenger-vehicle sales, which grew a solid 10% on the year for the five months through August. The central bank's rate hikes mean higher interest rates on auto loans, which could also dampen demand.

Pricey oil and a softer currency have hit the aviation industry especially hard. Though the sector has enjoyed 47 consecutive months of year-on-year domestic passenger growth in the double digits, cutthroat competition makes it difficult to raise fares.

InterGlobe Aviation -- operator of IndiGo, India's largest non-state-run airline -- reported a 97% plunge in net profit on the year for the April-June quarter. No. 2 Jet Airways and SpiceJet, another major carrier, both logged quarterly losses.

Expensive crude is also affecting the public directly through higher fuel costs. Gasoline prices in Mumbai set record highs for nine straight days through Monday, while diesel prices there logged a 14-day streak of fresh highs, according to state-owned Indian Oil.

The largest opposition party, the Indian National Congress, has called for nationwide demonstrations against Modi's government over surging fuel prices. Protesters staged a rail blockade in Mumbai this week, and police responded by detaining about 100 people, including opposition politicians.

Though Modi's Bharatiya Janata Party won an outright majority of lower house seats in the 2014 general election, its support has since eroded over such issues as the party's Hindu nationalism and a new tax system. Whether it can retain its majority in the next general election, likely to be held in April or May, is unclear.

Inflation is a major motivating issue for Indian voters. The opposition is attacking the government on this point in hopes of peeling off support from the BJP, but it has offered no concrete proposals to stabilize prices.

The ruling party, meanwhile, has insisted that the rupee's weakness stems from external factors. "There are virtually no domestic reasons" for the currency's decline, Finance Minister Arun Jaitley asserted last week.

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