Tuesday, June 12, 2012

Effect of falling Rupee

The government together with the RBI must be pro-active to prevent further fall in rupee.

Earlier, when the rupee was around Rs. 51.80 against the dollar, some attempts were made by the RBI to buy dollar. But it is surprising that RBI is reluctant to enter the market at this crucial time.CRISIL Research, India’s largest independent research house, has lowered India’s GDP growth forecast for 2012-13 to 6.5% from its March 2012 estimate of 7.0%.
Global investment bank Morgan Stanley estimates FY13 growth forecast to 5.8 per cent.

Let’s see some of the sectors affected and impacts:
1. Weakening Indian rupee triggers the cost of inputs for agriculture

The hike in excise duty in the Budget 2012 has already been passed on to consumers resulting in higher prices.
Agro-chemical makers have hiked their product prices by 10-15 percent ahead of the khariff sowing season. This is mainly since the drop in the rupee value has made their chemical inputs costlier.
2. Gold Prices Hit By Weak Indian Rupee
India is the world’s biggest gold consumer. The World Gold Council says the country accounts for 27% of the world’s demand for gold jewelry and investment. That means a weakened rupee (and consequently fewer Indians buying gold) has a significant bearing on global gold prices.
The currency’s weakness is ensuring local gold prices stay high, even while global gold prices drop.
3. Rupee slump hits Indian students abroad
The depreciating rupee has no doubt cast a cascading effect on the economy but the worst-hit are Indian students studying abroad or those planning for higher studies in foreign universities as they have to shell out more money compared to what it was required a year ago.
Rupee slump affects middle class families more, as usually they take education loans for payments of fees.
4. Weakening Rupee: Good for NRIs, Bad for Indian Economy
Right Time for NRIs to Send Money to India
This means that a NRI who remitted $1000 to his family in India in early August was able to send only around Rs. 44,000. But if he sends the $1000 now, when the rupee has depreciated to Rs. 55, his family will receive Rs. 55000.
However, the more money goes to cover expenses due to inflation.
A weak rupee is bad for the Indian economy on the whole
Unfortunately, there is no visible sign of the rupee coming back to the 40-45 range in the next one year.
In fact, many market pundits believe that the rupee will hit the 56-57 range in the near-term before reversing back to the 50-52 level.

1. Fiscal  And Current Account Deficit
Higher deficit means the government will have to pay more and also print more rupee notes. This would result in excess supply of rupee in the market, leading to inflation and reduction in its value.
Current account deficit (CAD), which represents the net of import and export, results in more obligations for the country to make its payments in foreign currency.
2. Capital Outflows
The reasons for pulling out foreign money can be many. Bad business outlook, poor government policy, weak equity markets are just some of the examples that are currently acting against the Indian rupee.
3. General Anti-Avoidance Rule (GAAR)
The rule, if implemented, is likely to burden FIIs with more tax, thereby reducing the net profit. Foreign companies may reduce their investments in India. Obviously, this would lower the demand for the Indian rupee and weaken it further.
4. Dollar Demand-Supply
Rising oil prices mean more dollars are required by Indian oil companies to import crude oil since oil price is quoted in the US dollar in the international market.
5. Global Factors

The current crisis in the Euro zone may make investors more risk-averse. As a result, they may reduce their asset exposure from emerging economies like India, thereby selling more rupees.
Overall, there may be more bad news coming from the Euro zone. Hence, the dollar is getting stronger against other currencies, including the rupee.

1. Export-oriented Companies - beneficiaries
Companies which export goods and services to the US are the main beneficiaries of depreciation of the Indian rupee. They receive their revenue in US dollars whereas their major expense is in the Indian rupee.
Textile is another sector which will benefit from a weak rupee. The US is the top destination for India’s handloom products. The annual revenue from exports is pegged at little more than US$ 300 billion.
2. Import-oriented Companies - badly hit
With rupee weakening further, companies which import their goods and services from the US will be badly hit. Oil companies import huge amounts of crude oil, which is denominated in the US dollar. 
Like oil, metal commodities too are denominated in the US dollar. Hence, companies which are heavily dependent on outside sources for their raw material requirements are expected to take a hit on their bottom line.
3. Sectors Using Heavy Machinery
The sectors that use heavy machineries usually import them from outside India. These items are very expensive and require a huge amount of initial cash outflow.
Typically, companies borrow in foreign currency, also known as ECB (external commercial borrowing) to finance their investments.
The interest and principal repayment is spread over several years. When the rupee depreciates, these companies have to shell out more rupees to meet their payment obligations
4. High Oil Prices and Inflation

Not good for the Indian economy
Depreciating rupee raises the price of imports. Many companies depend on imported material for their production like automobiles, FMCG, tyres, and etc. The producers pass this on to the consumers.
Prices of cars, electronics, mobiles and computers will increase if the fall in rupee continues.
Depreciating rupee will make the oil costlier to import. Oil price is already high in India and is fueling inflation. Therefore a further rise in oil prices will adversely affect the Indian economy.

Indian guru blames rupee symbol for currency woes!
Rajkumar Jhanjhari, an expert in the ancient Hindu doctrine of Vastu Shastra, has called for a new design, arguing that a line on the symbol has “slit the throat” of the rupee and sparked the country’s financial gloom. He states, “India managed to withstand a severe global slump in 2009, before the symbol came up.”


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