While the export duty on oil could improve government finances marginally, the raising of import costs for gold is unlikely to curb local demand for the yellow metal. Economists forecast the rupee to breach the 80-per-dollar mark soon.
New Delhi last week announced an increase in gold import duty, export taxes on petroleum products and a cess on domestic crude production to prevent deficits from worsening.
“The measures are non-inflationary, will not improve the current account, but could have a positive impact on the Centre’s fiscal finances,” Nomura said in a report.
Nomura, however, kept its forecast for fiscal deficit unchanged at 6.8% of GDP for FY23, considering that the excise duty may not continue for the entire year. Nomura also maintained its current account deficit prediction at 3.3% of GDP in FY23, from 1.2% in FY22.
Nomura’s forex strategists expect the rupee to breach the 82 per dollar level by September.
Foreign portfolio investors (FPI) are selling more in countries with rising current account deficits like India because the currencies of such countries are vulnerable to further depreciation, said VK Vijayakumar, chief investment strategist,
In June, FPIs sold equity worth ₹50,145 crore, taking total FPI selling in the first half of 2022 to ₹2.24 lakh crore.
“This massive capital outflow has significantly contributed to the depreciation in rupee that breached 79 to the dollar recently. The relentless FPI selling has to be seen in context of a steadily rising dollar and bond yields in the US,” Vijayakumar said.
Nomura said that the rise in excise duty will raise domestic gold prices and discourage gold consumption, but only at the margins. Moreover, export taxes on petroleum products could lower oil product exports, more than offsetting any benefit (from lower gold imports) on the current account.
“Specific duties amid commodity volatility are a dampener as downside risks are unprotected, though the government said it would review this move every fortnight. Capping export gains, besides the domestic price freeze, is also a negative signal,” said Sabri Hazarika, senior research analyst at Emkay Global Financial Services.