The falling rupee and the rising petrol price

By Tensing Rodrigues*

It seems to be the time for the great roller-coaster ride. The rupee is sliding against the US dollar with no stop in sight and the petrol prices are rising to match it. In fact, it is the other way round. The oil prices in the global markets are rising and the rupee is falling to match them.

The price of oil has hit its highest level since November 2014. Brent crude futures the international benchmark, has risen by around half in the past year. The reasons for the oil price rise are many but if we are to sum them up in one word, we could say ‘fear’.

The US president’s ‘mishandling’ of the nuclear deal with Iran has caused the global markets to price in the impact of Iranian crude exports falling; around four per cent of global oil supplies come from Iran. Major oil-producing countries led by Saudi Arabia and Russia have been cutting production for the last 17 months or so to bring global oil supply and demand back into balance after being down in the dumps for long years.

OPEC finally feels it is ‘mission accomplished’ but OPEC may not be much in control. The political and economic crises affecting Venezuela have cut oil supplies beyond what OPEC had contemplated. The ongoing tension between Saudi Arabia and Iran continuing conflicts in Iraq, Libya, Syria and Yemen have significantly taken their toll. And nobody knows which way the future lies.

Do the petrol and diesel prices we pay have to move in tandem with the global oil price?  Given the fact that India imports almost 80 per cent of its oil requirement the connection is pretty strong. But the price we pay need not necessarily toe the global oil price given the fact that the domestic taxes on petrol is almost 100 per cent and on diesel is about 60 to 70 per cent. But the big question is should the government absorb the impact of the oil price rise and moderate the hit on the consumer? The answer to that cannot be easy. By absorbing the impact, the government can curtail the cost inflation with its cascading effect. The aam aurat  will only be happy. But is that really in her interest? Just as the government has a big buffer to absorb the oil price rise the consumer has a big buffer to cut her petrol consumption.

And that is very important. Let us accept that we use much more petrol than we really need to. If we look at our own habits this becomes more than obvious. I am convinced that this was true at least in my case. When I used a scooter I used to do at least 20 to 25 km running every day. This included several short runs of less than one km which was ridiculous. Now I do almost 10 km walking every day. That is the buffer I am talking about. Cheap fuel encourages us to guzzle it while costly fuel makes us look for alternatives. Like my friend Prof. Sanjay Desai who cycles to cut on petrol use.

There is another side to that story. The government earns revenue from the taxes levied on fuel. If these taxes are lowered, then the revenue has to be collected through taxes on something else. What are the alternative items taxes on which can be hiked? Sugar, cloth, cement, beer, onions, cellphones, …? Do try to think seriously about it. Better still, just imagine that a candidate assures you that she will double the taxes on these items will you vote for her?

In the meantime the rupee is falling against the dollar. Here again the cause is the fear. The entire basket of emerging market currencies is losing against the dollar even the Chinese Yuan has not been spared. The factor weighing most on them is again the oil price rise. But the question is not so much the “why”, as “so what” should RBI intervene? As in the case of the rising fuel prices it is politically right to help rupee hold its value. In the aam aurat psyche a stable rupee is more reassuring. Despite the bare truth that not many of us are going to buy dollars so it matters little to us if the dollar sells for Rs 800 a dozen or for Rs 850 a dozen. The price of eggs would in fact matter more. But the going down hurts somehow.  So it is politically right particularly with the elections so close to hold the petrol down and rupee up. But Viagra has long term ill effects on health! The sentiment apart and the politics apart it makes sense to numb our feelings and muster courage. Let rupee find its own level against the dollar. As Bloomberg puts it, “the Rupee is falling and India should let it.”

* The author is an investment consultant. Readers can send their comments and queries to investment.ideas.shop@gmail.com