Impact of current falling of  Indian Rupee against US Dollar

We all are witnessing falling value of  the Indian rupee against the US dollar. Our policy maker and economists are trying to find out the way to come out from this situation with their best efforts. RBI has become mute spectator as it has no more options to stop this fall. The windfall from a 23% drop in the value of the rupee against the dollar in the last one year has impacted our equity market, debt position of the corporates , fiscal deficit , capital inflow, import and export figure and overall economic environment. It is very difficult to analyze the overall impact of the falling rupee but here in this article we are trying to study the major impact of falling rupee to the some extent.

Impact on Export and Import Industry

In normal sense, a depreciating rupee should have made Indian exports cheaper and more competitive. But in this fall exporters are not happy due to a combination of shrinking global markets and rising import content of Indian exports, a weakening rupee does not necessarily translate into enhanced exports. Worse, because imports are largely inelastic, with oil and gold accounting for 44% of India’s purchases from overseas, declining exports can only mean that the trade deficit would widen, putting further pressure on the balance of payments.

A weak rupee should make exports cheaper and imports costlier. Both these should have a positive impact on the trade deficit and current account deficit, which is somehow not happening. A part of the problem is that over the past few years, the composition of India’s exports has changed in favour of value-added products, in contrast with the past when primary products and textiles products dominate in import segment. While sectors such as engineering, chemicals, and gems and jewellery have been the key drivers of India’s exports, due to a high import content in such products, the depreciation of the rupee does not fully translate into gains for exporters.

It is a big challenge for India to assess the fair value of its currency. Sometimes, speculators can take the currency far away from its fair value. The rupee depreciation will also put additional pressure on domestic inflation by making imports costlier. A 10% depreciation could have an impact of 140 basis points on inflation over a period of time. (A basis point is one-hundredth of a percentage point)

Impact on debt

On account of their aggressive global expansion strategy and the need to find cheaper sources of funds, as opposed to depending on costly domestic credit, Indian companies have taken dollar-denominated loans. The weakening of the rupee is expected to significantly raise their debt burden in rupee terms. Many information technology (IT) firms do see a benefit in their rupee revenue and, therefore, their margins and profitability, but for quite a few quarters now, the concern has shifted to the revenue front— particularly in Europe and the US.

Impact on capital inflow

Policy paralysis and an inability to pursue serious fiscal correction are great worry for foreign investors, particularly institutional investors. There is a risk of capital inflows holding out due to fears of a weakening rupee, which triggers another round of currency depreciation, setting off another round of a negative macroeconomic response. This has resulted in diminished capital inflows, which in turn have only increased the pressure on the rupee, pushing it down to a record low of 56.38 on 24 May.

Outlook

Since India is globally more integrated than it was in the past—not just in terms of merchandise trade, but also in the actual movement of people and a rapidly expanding corporate footprint . The uncertainty surrounding Europe, struggling with a debt crisis, has only made the outlook that much bleaker. A current account deficit that’s above 3% of GDP will be difficult to finance. The medium-term target should be to bring the deficit below that level. According to many analysts if the overall macroeconomic situation does not change, it is likely that the rupee will remain weak.

Regards,

Arvind Trivedi

Certified Financial planner