House economists at the nation's largest lender SBI have forecast more pain for the rupee if the ongoing Ukraine war lingers, plumbing to a new low of 77.5 to a dollar by June and marginally improving to 77 by end-December.
They also said the current account deficit (CAD) will be at 3.5 per cent if crude oil trades at USD 130 a barrel, pulling down growth to 7.1 per cent.
If FY23 average oil price rises to USD 100 a barrel, it will pull down growth to around 7.6 per cent from 8 per cent estimated earlier, inflation will rise to 5 per cent from 4.5 per cent, and the current account gap will jump to USD 86.6 billion or 2.5 per cent of GDP and can soar to 3.5 per cent if oil prices average at USD 130 billion.
In that case, inflation will trend at 5.7 per cent and GDP growth will come down to 7.1 per cent, Soumya Kanti Ghosh, the group chief economic adviser at State Bank of India, said in a note on Monday.
The rupee is the worst hit emerging market currency since the invasion of Ukraine by Russia and the resultant sweeping economic sanctions against Moscow.
Crude has been on the boil since the invasion -- jumping from USD 93 to USD 130 a barrel last week, before moderating to USD 110 levels.
Russia supplies as much as 14 per cent of global crude supplies and 17 per cent of world's natural gas.
The near-term outlook for the rupee remains challenging until geopolitical tensions moderate. With uncertainties being high, this can further dampen portfolio inflows, which have already been in reverse gear so far in 2022 with outflows worth USD 12 billion, he said.
The war has led to almost all other commodities, including agri commodities, witnessing price increases.
Forecasting really tough time for the rupee, which had last week plunged to a record low of 77.01, he said if the Ukraine conflict drags on for now, rupee can tumble to 77.5 by June and marginally improve to 77 to a dollar by December 2022.
Even if the Russian-Ukraine conflict drags on for now, though the rupee is likely to trade in an elevated zone, the FY23 average should not be higher than 76-78, with an appreciating bias, Ghosh added.
During the last global financial crisis, the rupee continued to decline and lost around 13 per cent during January 2008 to July 2011. However, after the crisis, the volatility became significant and the rupee plunged by a whopping 41 per cent during July 2011 to November 2013.
On the impact of the extreme volatility in crude oil prices on CAD, inflation and GDP, he said every USD 10 per barrel increase in Brent prices will lead to increase in inflation by 20-25 bps, widen the current account deficit by 35 bps of GDP, increase fiscal deficit by 8 bps and lower GDP by 15-20 bps.
Crude sticking above USD 100 level for next few months along with hurting commodity prices can be the Damocles sword for emerging markets, he noted.
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