Rising and falling with the rupee

More than anybody else, the rupee fall has obviously made exporters happy. In fact, the strengthening of the rupee in the last two years was one factor which affected the export growth in the last year. The six per cent depreciation in the last three months will boost their export earnings when they convert their dollar receivables into the rupees. There is no wonder that FIEO (Federation of Indian Export Organisations) president Ramu Deora wants further depreciation of the rupee against the dollar.

Experts also argue that the rupee fall was in line with the currency realignments in other Asian countries. The 10-40 per cent fall in other Asian currencies has made goods produced in these countries cheaper. Had the Indian currency not depreciated against the dollar, Indian exports would have suffered again.

These factors might have weighed heavily in the minds of central bank officials when the apex bank allowed the rupee to depreciate gradually with minimal intervention. Even then the RBI is believed to have sold over $ 1.30 billion in the forex market to stem the rupee slide. (The RBI uses its foreign exchange reserves — which currently amount to $ 30 billion — to regulate the rupee-dollar movement. When the rupee falls, it means there is a rise in demand for dollars and vice versa. Also when there is a rise in dollar inflow from abroad, the rupee will strengthen and the dollar depreciates. Similarly, when the RBI buys dollars from the open market — read banks — it will weaken that currency against the rupee and vice versa).

K N Dey of Mecklai Financial feels that the rupee should reach its correct value on its own. After propping up the rupee for almost two years, the central bank now seems to be veering to this idea. When the rupee crashed by almost 40 paise to Rs 37.85 on Friday from Rs 37.44 on the previous day, the RBI did not intervene in a big way and allowed speculators in the forex market to slam the rupee down. “The political turmoil in the country has accelerated the rupee fall,” said a forex dealer.

The reason is that foreign inflows, mainly foreign direct investment (FDI), will be hit. If the UF government falls, there can be another general elections in less than two years. If this crisis results in elections, there will be hardly any inflows for new projects over the next few months until elections are held and a new government is formed. “Investors will prefer to wait for some time to see how the government and policies are being formed,” said an official with a leading multinational.

This is also at a time when there are already concerns on the FDI front. FDI in the first half of 1996-97 was only around $1.5 billion as against $ 2.7 billion registered in the same period of last year. Similarly, portfolio investments by foreign investment firms will also be under pressure. “There is a tendency among FIIs to unload shares and stay away from fresh buying commitments when the currency is showing high volatility,” said an FII official. In fact, there was a net FII fund outflow of Rs 212 crore in the 15 days of November, mainly due to rupee depreciation and political fears.

The decline of the rupee will have an impact on almost all segments of industry, stock markets and travellers. For corporates, the impact will be mixed. While export-oriented unis, hotels and shipping companies will benefit from the fall, import-intensive companies will suffer. Companies which are importing raw materials, plant and machinery will find their cost going up. “The impact will be neutralised. The losses on account of the rupee fall will be offset by the gains by others. For example one can be an importer as well as an exporter,” said a corporate source.

Leading bankers said remittances from abroad, especially non-resident Indians will get a big boost as a result of the rupee movement. The reason is that they will get more rupees after converting their dollars. At the same time, foreign travellers will have to shell out more rupees to buy dollars. Corporates which were going large numbers for external commercial borrowings (ECBs) have suddenly turned shy as the exchange risk has now increased. The fall in interest rates at home and rupee crash have made things difficult for companies to go for overseas loans. Panicky over further rupee fall, companies which had taken ECBs are now rushing to buy dollars to cover their position.

It is not only the stock markets even the bullion market was rocked by the rupee volatility. Silver prices have been going up in the las few days as the dollar has strengthened at the cost of the rupee. However, it was not reflected in gold prices as the import policy for the yellow metal has been liberalised.

Another casualty is the petroleum sector. Even though the government officials state that the oil import bill will not exceed the target of $ 9.4 billion set for the year, there is a fear that the oil bill will shoot up if the rupee depreciates further. Only 60 per cent of the requirement of the country has been imported so far. On top of this, international crude oil prices have also been rising.

Even as rupee plunges on a daily basis, debate is still going on what is the real value of the rupee and to what extent it has to depreciate. While some privately forecast a rupee rate of Rs 40 per dollar by the end of March, others like Peregrine see it going to 38.5 and recovering to 37.40 by March. A top official of Siemens feels the rupee should depreciate to Rs 45 for the correct level. Rangarajan says “the adjustment that has already taken place in the value of the rupee was adequate in view of the fundamentals.”

Significantly, the new RBI Governor has not yet made any observation on the rupee front. The depreciation lobby — which wants the rupee to seek its own level — seems to be having upper hand now. The RBI and the government also seem to have finally arrived at that conclusion that when currencies everywhere is falling, India should not be an exception.