On May 30, 2012, Indian Rupee breached the Rs 56 per US Dollar mark and closed at 56.24 – its all-time low against dollar. The rupee has depreciated by over 12 per cent to close to 50-a-dollar mark currently from its near 44-level against the US currency at the end of July 2011 due to sustained dollar demand from banks and importers in view of the firm dollar sentiment fueled by Euro zone crisis. The weakening of Indian rupee against other foreign currencies, especially dollar, is not good news for Indian government and importers. A depreciating rupee may compound the macroeconomic problems as prices of imported goods will surge and worsen the current account deficit. India won’t be able to take advantage even if commodity prices ease due to global slowdown.
Why is rupee depreciating?
The ongoing Rupee weakness is basically due to the European crisis and has nothing to do with the domestic economy. Due to the uptrending crisis in Europe, large banks, investors and financial institutions started selling Euro and bought Dollar, thus Dollar appreciated against all major currencies including Rupee.
Impact of Inflation graph and Fiscal deficit of India
India is suffering from a nearing two digit inflationary pressure. A depreciation Rupee will add fuel to this. It leads to high inflation, as India imports around 70 per cent of its crude oil requirement and the government will have to pay more for it in Rupee terms. Due to the control on oil prices, the Government may not easily pass the increased prices to the consumers. Further, this higher import bill will lead to rise in fiscal deficit for the Government and will push the inflation.
Indian Rupee depreciating against Dollar has heavily impacted the following:
- Impact on Exporters:
When a currency depreciates, the exporters make more profit because they get more of the local currency for every unit of foreign currency though the quantity of trade remains unchanged. The depreciating Rupee will be positive for the Indian IT sector which generate more than 85 percent of their USD 70 billion revenue from the overseas markets and this kind of appreciation in foreign currency will enhance their actual realisation of revenue in dollar terms.
- Impact of depreciation on Indian Importers:
India’s imports will also have to pay more in Rupee terms for procuring their raw materials, despite drop in global commodity prices, only because of a depreciating Rupee against Dollar. Corporate India is a net borrower of Dollar and to that extent a depreciating Rupee impacts its balance sheet adversely. Companies with foreign debt on their books are badly impacted. With the Rupee depreciating against the Dollar, these companies will need more Rupees to repay their Dollar funded loans. This will increase their debt burden and lower their profits. Obviously, investors would do better to stay away from companies with high foreign debt.
- Impact on Foreign Institutional Investors (FII) flows to Indian market:
Rupee depreciation is a huge risk for FII’s who are planning to invest in India. If a FII invest USD 10,000, it can buy stock worth Rs 550,000 at current market price. Consider a scenario where after a year, assuming the stock made no loss/profit and Rupee depreciated to Rs 60 against Dollar, the stock is sold for Rs 550,000. While the net return in Rupee terms is NIL, the FII suffers loss on conversion of the amount in Dollars.
- The Rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediate products all are getting affected.
- Although the prices of most of the imported commodities have fallen, the depreciating Rupee has meant that the importer gets no respite as they need to pay more to purchase the same quantity of raw materials.
- The depreciating Rupee would keep the price of imported commodities elevated. Thus the industrial sector and in turn the consumer goods sectors are bound to get adversely hit.
- Individually, traveling abroad becomes more expensive as travel cost can go up by around 15 per cent compared to last July figures. Also, students studying abroad too will be hit as more Rupees will go out to pay for the courses, stay and other expenses.