Tuesday, June 11, 2013

Soon Rupee may be Senior Citizen

The rupee recorded a new low of 58.15 against dollar on Monday, June 10, 2013, which is 7.7% fall in value since May 01, 2013.  Further, it witnessed around 30% fall since August 2011, when the rupee stood at 44 against 1 USD. Along with USD, the rupee has experience fall in its value against Pound, Euro, Yen. 
Further, fall in rupee has also impacted the currency value of other currencies such as Indonesian rupiah.  

The factors influencing the value of currency are nation’s imports and exports, inflation and general price level in the economy, employment and interest rates, economy’s growth rate, current account or the trade deficit, inflow of investment in country whether in form of FII, FDI or repatriation by NRI, macroeconomic policies, movement in foreign exchange reserves and other macroeconomic policies.

However, in current case, the major factors that caused the rupee to fall are exit by FII from India on revival of US economy, low GDP growth, and widening current account deficit.  
  • FII outflow: The FII has began to sell their stake as weakening rupee erodes their Indian Share portfolio and deters them from investing in India. The revival of US economy has also encouraged them to invest in developed nations like US compare to India. Thereby FII have becomes net seller now, putting pressure on rupee. Further, the FII capital outflow is expected to continue for another 15 days, and would further weaken the rupee to 59 against USD.
  • Bonds Market: With revival of US economy, the differential yield between Indian government bonds and US treasury securities narrowed and bond investors exited Indian securities to prefer US bonds.
  • Rising Trade deficit: The current account deficit (CAD) continues to increase. The crude oil and gold is a major component of India’s import and adversely affecting CAD. The government efforts to curb gold import have provided support to rupee. Also, the Indian economy is experiencing low GDP growth rate of around 5%, which makes it difficult to attract and retains FII
Impact of weakening rupee
For Industry
  • FMCG companies like Hindustan lever, P&G, are likely to experience fall in their profitability as raw material cost continues to increase and high inflation will reduce the purchasing power of consumer, and consumer may defer their purchase requirement.
  • The weakening rupee will continue to make crude oil costlier, which accounts for 35-40% of India’s import. Oil marketing companies like BPCL, HPCL are likely to face dent on its profitability, if they fail to pass on the cost to consumers.
  • Automobile companies which sources car and its components from other countries will have to pay higher amount for the same goods. Further, the high inflation along with rising fuel cost, may act as a deterrent to raise car prices. Further, the automobile companies would suffer indirectly on account of higher cost of natural rubber, which is mostly imported and is a major raw material for tyre industry.
  • Gold is a major item of import and one of the causes of widening current account deficit. With weakening of rupee and imposition of duties on gold import, companies in Gems and Jewellery industry like Tanshiq, Tribhovandas Bhimiji Zaveri are likely to face adverse effect on its profitability.
  • Companies in Tourism industry like Cox and Kings, Thomas Cook may find low customers as high inflation and interest rate may led to low disposable income and  customers may postpone their trips to future date.
  • Companies that have high foreign debt on its balance sheet like Reliance communication, Tata power, Idea Cellular will be hurt be adverse movement of rupee
For Consumer
  • The costlier crude oil will increase petrol and diesel prices. Thereby, the transportation will become costlier. Further, this will increase the price of all products that are transported from one part of the country to other part, namely Food items like fruits, vegetables, grains and pluses.
  • Crude oil is also an input for soap, deodorants, shampoo, and detergents. Thereby there is likelihood that such FMCG products would become costlier.
  • Foreign vacation will be costlier as fall in rupee value will lead to increase in air fares, will make stay abroad, eating and shopping in foreign land costlier.
  • Electronic goods like laptops, mobile handset, computers, television which are imported into India for consumption will become costlier.
  • International Food Outlets like pizza hut, Dominos which import major sources of raw material will experience impact on its profitability if it continues to maintain its retail prices.
  • Car: Many international car companies have setup their shop in India, to capture Indian market, however, the weakening of rupee have forced them to increase their retail price, thereby making car purchase more expensive for end consumer.
  • Students: Students planning to go abroad for higher studies will have to shell out higher amount as rupee continues to weaken.
Benefits
  • NRI investment in NRE and NRO accounts: NRI individuals would benefit on weakening of rupee as their Indian peers would receive higher value for same amount of dollar transferred.
  • Exporters: 
    • Indian companies have an opportunity to sale its product in countries like US, UK, Japan as weak rupee would make its product cheaper in foreign land and increase its revenue. This benefit would be limited in case of export to countries like China, Malaysia which have also experienced fall in its currency value
    • IT Companies would benefit from weakening on the rupee as export of services would become cheaper and it would also make it competitive. The part of positive impact may be negated, if the IT companies pass on some benefit of weakening rupee to its client to develop long term relations. Thereby the overall benefit of weakening rupee on profitability of such companies will be limited.
Measures taken by RBI
To counter the fall in value of rupee, RBI deregulated interest rate on saving and fixed account deposit for NRE and NRO account, to attract foreign investment inflow from NRI.

RBI has eased interest rate to increase funds in the economy over last three policy review meeting. However, it is unlikely that RBI will continue with its practice to ease interest rate in its meeting on June 17, as this would increase inflation in the economy.     

Any further weakening of the currency will also undermine efforts taken by RBI and government to increase FII inflows in the country. Analyzing the current economic scenario, Many analysts are of opinion that the rupee is expected to remain low for some time in future

Reference

  1. FP Staff (June 11, 2013), “Rupee extends weakness, falls to 58.33/$ : All you need to know”, http://www.firstpost.com/economy/rupee-extends-weakness-falls-to-58-33-all-you-need-to-know-858319.html, accessed on June 11, 2013
  2. NDTV (June 10, 2013), “How a weak rupee impacts you”, http://profit.ndtv.com/news/cheat-sheet/article-how-a-weak-rupee-impacts-you-323179, accessed on June 11, 2013
  3. Economic Times.com, (June 11, 2013) “HPCL, BPCL tank over 3% on weak rupee”, http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/hpcl-bpcl-tank-over-3-on-weak-rupee/articleshow/20520407.cms, accessed on June 11, 2013
  4. ET Bureau ( June 11, 2013) “With rupee weak, RBI may have little room to cut interest rates”, http://economictimes.indiatimes.com/news/economy/policy/with-rupee-weak-rbi-may-have-little-room-to-cut-interest-rates/articleshow/20531579.cms, accessed on June 11, 2013
  5. Reuters (June 10, 2013) “Bonds fall for 4th day on record-low rupee, FII selling” http://economictimes.indiatimes.com/markets/bonds/bonds-fall-for-4th-day-on-record-low-rupee-fii-selling/articleshow/20524171.cms, accessed on June 11, 2013
  6. Chandralekha Mukerji, (Feb 2012) “Tighten Your Purse Strings”, http://businesstoday.intoday.in/story/rupee-fall-value-us-dollar-impact-prices-essential-commodities/1/21862.html, accessed on June 11, 2013
  7. Pritam P Hans (Feb 2012) “Solving The Riddle”,  http://businesstoday.intoday.in/story/rupee-dollar-value-drop-factors-for-fall/1/21881.html, accessed on June 11, 2013