Rupee at new low, clocks 73-mark; Here’s how states are going to benefit from free fall

The Indian rupee has turned among worst performer on Emerging markets, and looks like there is no relief in this currency against US dollar benchmark indices. The Indian rupee has touched a low of over 73-mark against the dollar at interbank forex market. In few hours of today’s trading session, it has clocked a high of 73.005, however, at around 1301 hours, the domestic currency is trading at 72.334 below 0.251 points or 0.35% per dollar.

On today’s trading, Anindya Banerjee analysts at Kotak Securities said, “ For the day, we would remain buyers closer to 71.70 levels on spot, with stops on a daily closing basis below 71.50. Upside targets are round numbers, viz., 72.10 and 72.50/70 on spot. Neverthless, in case of a close below 71.50, downside targets will be 70.70 and 70.40 in the corrective trend.”

Banerjee explains, rupee is mostly to kick off the week at a fresh all-time low of 72.15 on spot. Trade tensions, oil and stronger US economic data remain the factors driving the tactical move in the pair. For the week, traders have two important piece of data from Indian economy chew upon, one is July industrial production data and other, consumer inflation release for August.

Now the weakening of Indian rupee comes as a negative factor for Indian economy as it creates inflationary pressure, higher import bills, hampers government cost of borrowing and impact fiscal deficit.

Interestingly, it is being known that states are expected to gain with the free fall in Indian rupee coupled with rising petrol and diesel prices.

A SBI research report explains, the recent Rupee depreciation with the rising crude oil prices has made the headlines and created the anxiety that rupee may depreciate further. Though the decline in rupee could be attributed to several external factors but it has made a significant impact on crude oil prices.

In the last 6 months (since Mar’18) Petrol and Diesel prices have increased by Rs 5.60 and Rs 6.31, respectively in Delhi. With this increase, petrol prices crossed Rs 89 litre in Maharashtra (highest). The variation in prices in different States is primarily due to different rates of VAT, for e.g., Maharashtra (39.12% per litre) has the highest rate of VAT on petrol and Goa (16.66% per litre) has the lowest. All other States lie in this range only.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI says, “This increase in petrol and diesel prices gives States a windfall gain because of tax on tax approach followed across States. There are central excise duty, transportation costs, commission costs and other charges that are levied on the input price. On top of these, the state tax/VAT is levied.”

Ghosh adds, “We estimate that States will receive Rs 22,700 crore additional revenue over and above the budget estimates of states revenue. By looking into the $1/barrel increase in oil prices, this translates Rs 1513 crore to all the major 19 states.”

According to Ghosh, the largest gain would be in Maharashtra (Rs 3389 crore) followed by Gujarat (Rs 2842 crore). This windfall gain will have positive impact on State finances, which might push the States fiscal deficit by 15-20 bps downward.

Furthermore, Ghosh also highlighted that, as s the states are getting surplus revenue, so they can cut the petrol prices by Rs 3.20 /litre and diesel by Rs 2.30/ litre, without affecting their revenue arithmetic.

However, Ghosh adds, “States are not doing this, only to manage their unforeseen expenditure like farm loan waiver in Uttar Pradesh, Maharashtra, Karnataka, etc.”