First Published: Mon, Jun 10 2013. 09 49 PM IST
The Indian rupee closed at a lifetime low of 58.15 to a dollar on Monday as the dollar continued to strengthen against emerging market as well as major global currencies. The local currency has lost the most value since the beginning of May among major emerging market currencies except for the South African rand. That is attributable to a high current account deficit and persistently high inflation. Finance ministry officials played down the rupee’s movement, saying it was in sync with other global currencies. Currency traders and experts remain divided on the rupee’s future direction. As the rupee’s direction remains unclear, here’s a look at the impact of a sharp depreciation on the economy and various sectors:
Trade and fiscal deficit
A weak currency might worsen India’s trade deficit. The rupee is not the only currency which is depreciating, so there is not much increase in export competitiveness at a time when global recovery is still fragile. Experts warn that in terms of the real effective exchange rate (REER), or a currency’s strength against its trading partners, the rupee is still over-valued. At the same time, a weak rupee will weigh on the import bill, worsening the trade deficit. The currency’s depreciation will also add to the current account deficit—a 2% fall in REER, by around 0.2 percentage points according to Nomura. And it will add to the fiscal deficit by making oil imports costlier—a Re1 depreciation by around Rs4000 crore, according to Nomura.
Fuel inflation
A fast falling rupee offsets the benefits of lower commodity prices. In the case of products such as fuel, a falling rupee is straightaway translated into an increase in the retail prices. In case of other products, the depreciating currency will increase the price of imported raw materials. That impact on consumer prices will be seen when the companies pass on the costs. A 10% depreciation in the currency could cause a 1-2% increase in inflation, according to Nomura.
Interest rates
If inflation comes under pressure, rate cuts will be delayed. As such, the Reserve Bank of India (RBI) mentioned in its annual policy on 3 May that there was “little space for further easing.”
Foreign investments
Foreign capital inflows are typically at risk when the local currency weakens. Already, portfolio flows into both debt and equity have been gradually tapering, with investors subscribing to the view that the local currency could depreciate further from here. The average daily net FII inflows into equities tumbled to $27.22 million in June compared with $171.4 million in May, according to data from market regulator, the Securities and Exchange Board of India or Sebi.
The situation is worse in debt with FIIs pulling out $1.5 billion in each session in June compared with a $23.6 million average daily inflows the previous month. As the interest rate arbitrage (between Indian government bond and US Treasury yields) becomes less attractive, further capital flows will be compromised.
Corporate profits
In a country dependent on imports for many raw materials, a weaker rupee impacts the profits of companies at a time when they are already stressed. Thair interest burden will also increase on foreign currency denominated debt. According to government statistics, out of India’s $376 billion outstanding external debt, about 23% or $85.3 billion comprises external commercial borrowings or ECBs.
Software exports
As most Indian software firms derive over half their revenues from the US, a weaker rupee is good news for them. On average, a one percentage point depreciation in the rupee translates into a 0.3-0.5 percentage point gain in operating margins for IT companies, according to analysts.
Pharma exports
Most pharma companies export more than they import and will gain.
Auto companies
There is no single trend that can encapsulate the auto industry because of varying levels of imports from countries as diverse as Germany and Japan. Companies selling models assembled from so-called completely knocked down kits will perforce have to increase retail prices -- unless they are willing to cut their margins.
Power companies
Struggling with a scarcity of coal, power firms are dependent on imports of the fuel to keep their plants running. A depreciating rupee will dent margins either by raising fuel costs or by making the economics of running the plant on imported coal unviable. And not all power producers will be able to pass on this increased cost to consumers.
Aviation companies
Most airlines spend in dollars, and the bulk of their earnings is in rupees. That will mean more pain for an already troubled sector.
(Krishna Merchant, P R Sanjai, Makarand Gadgil, Shally Seth Mohile, Ruchita Saxena, CH Unnikrishnan, Zahra Z Khan, Ami Shah and Ravindra Sonavane)
Courtesy link : http://www.livemint.com/Home-Page/1vJJst0nIVokiAisZ91zpI/Rupees-record-slide-brings-pain-and-gain-for-India.html
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