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Friday, June 24, 2022

Explained: Where the rupee is headed, and what its fall means to consumers, markets

The depreciation of the rupee expected to impact the economy in general and various segments such as imports, mainly fuel prices, and push up inflation.

Written by George Mathew | Mumbai |
Updated: May 22, 2022 7:01:58 am
The rupee closed at a record low of 77.72 against the dollar on Thursday (Bloomberg Photo/File)

The rupee closed at a record low of 77.72 against the dollar on Thursday, a loss to over 6% in the last one year as it gets weighed down by rising inflation, interest rates, exit of foreign investors and plunging markets. The depreciation is expected to impact the economy in general and various segments such as imports, mainly fuel prices, and push up inflation.

Why the fall?

Since the time Russia invaded Ukraine, the rupee has depreciated about 4% cent while currencies in other emerging markets have depreciated 4-7%. The rupee has been hitting fresh all-time lows of late due to a rise in the dollar index and concerns around global economic growth.

“The weak economic data around the world, especially in China, has put pressure on the dollar index, which hit a nearly two-decade high. Domestically, we are witnessing an outflow of funds as investors move funds to high-yielding investment instruments. A rise in interest rates in the US will result in further outflows,” said Nish Bhatt, Founder & CEO, Millwood Kane International.

Rising import costs and a growing current account deficit have been key reasons for the weakening of the rupee, said Devendra Pant, chief economist, India Ratings. India’s merchandise trade deficit widened to $20.1 billion in April.

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The jump in Brent crude oil prices to 14-year highs and the ongoing conflict in Ukraine triggered the recent fall. The US Federal Reserve’s decision to tighten the monetary policy and hike interest rates has led foreign portfolio investors (FPI) to pull out Rs 168,000 crore since January 2022.

What will be the impact, and will exporters benefit ?

Analysts said a lower rupee against the dollar keeps import bills higher, pushing inflation even higher. Higher inflation is detrimental to the overall market. “If the rupee does not strengthen, FPI outflows will continue, which is another negative factor for the market. A strong dollar is good for export-oriented companies, but bad for import-oriented industries like oil, gas and chemicals. It is also bad for companies which pay foreign companies royalties for franchises in India,” said Ravi Singhal, Vice Chairman GCL securities Ltd.

Also, oil and other imported components will get costlier, which will further lead to even higher inflation. India imports nearly 80% of its fuel requirements. Auto, real estate, and infrastructure sectors would be worst hit whereas IT and banks will be impacted positively, said an analyst.

Travellers and students studying abroad will have to shell out more rupees to buy dollars from banks.

Exporters may benefit as the depreciation in currency improves the competitiveness of Indian goods and services. However, since most of the competing currencies are also depreciating against the US dollar, the benefit could be limited. Economists also say that exporters would benefit only if they enhance their efficiency and reduce their production cost, improving their competitiveness vis-a-vis exporters from competing countries.

What can one do to reduce the impact?

Experts say hedging is the only way for importers to protect themselves, but the rising cost of hedging limits this protection. “The hedging cost is around 4%. One should check the forward cost and only if it’s less than the depreciation in currency does it make sense,” said Madan Sabnavis, Chief Economist at Bank of Baroda.

What’s the impact on markets?

A depreciation in the rupee is never good for the overall equity market. It may affect foreign investors pulling out of Indian markets, resulting in a decline in stocks and equity mutual fund investments, according to Ravi Singh, Vice President and Head, Research ShareIndia.

Investors are worried about the exit of the foreign investors and its impact on the rupee’s decline.

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Will the rupee fall further?

“We expect the currency to face pressure as inflation is on an upward spiral, raising concerns about further rate action by the central bank,” Bhatt said. The rupee is expected to remain under pressure amid a strong dollar and elevating inflationary pressure in India. Persistent FPI outflows are also expected to weigh on the currency. The US dollar is expected to remain strong in the week ahead amid risk aversion in the global market. Additionally, the outlook for the global economy is looking gloomy amid supply chain disruptions, the lockdown in China, and the war in Ukraine, which are expected to keep the safe-haven dollar in demand.

Relief is possible only if the dollar index cools off. “Hence, the rupee can be seen as weak till the time it’s below 76.50… and it can touch 78 in the coming sessions, which might create fresh short unwinding in the dollar, making the rupee even weaker,” said Jateen Trivedi, Senior Research Analyst at LKP Securities.

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