The rupee’s slide, from around 83.8 to 85.8-to-the-dollar between end-September and now, has introduced a new source of uncertainty for economic agents and policymakers alike. With most globally-traded commodities priced in dollars and those showing little signs of easing — Brent crude has crossed $75/barrel for the first time in two months — it has complicated both costing and fiscal calculations. So long as the rupee moved within an 82-84 range, as it did for nearly two years from early-October 2022, only dollar prices mattered. But today, it’s not just prices in dollars, but also the corresponding exchange rate in rupees that needs to be factored in. Compounding the situation further is the lack of clarity on how much more the rupee would weaken in the coming weeks and months. As things stand, the long-dollar, short-rupee trade looks likely to continue, at least till the inauguration of US President-elect Donald Trump and his initial policy pronouncements. The effects of these are already being seen, for instance, in fertilisers.
Take di-ammonium phosphate (DAP), India’s second-most consumed fertiliser after urea, whose current landed import price is upwards of $630 per tonne. A Rs 2-to-the-dollar depreciation would push up the value of shipments contracted at that price by Rs 1,260 per tonne. Not for nothing, then, that fertiliser companies are hesitant to import. In this case, their worry is not only over the import price in dollars and the exchange rate, but also whether the government would permit them to pass on the resultant higher cost to farmers. The government, on the other hand, does not want companies to increase the maximum retail price (MRP) from the present Rs 27,000 per tonne. It has approved the extension of a special subsidy of Rs 3,500/tonne, which was being given on DAP till December 31, for a further one-year period. But that additional subsidy cannot cover the impact of rupee depreciation. It, then, leaves only two choices, of either allowing an MRP hike or the government incurring an even higher fertiliser subsidy bill.
The rupee’s weakening is, in a sense, a wake-up call, be it for the government or those with unhedged foreign currency exposures. An overvalued rupee made it easier for the government to keep prices of imported fertilisers and fuel artificially low for farmers/consumers and for firms to borrow cheap in dollars without protecting against exchange risk. Imports also became a default sourcing option for companies, including big retailers, that did not really try to build domestic production supply chains. Those options that were seemingly easy and costless are no longer so. This is the right time for the government to leave it more to the market to decide what the MRP of DAP or the rupee’s exchange rate should be.
