The rupee has been depreciating against the dollar and most other currencies and this is creating much trepidation amongst Indian businesses. It had fallen to almost Rs. 50 against the dollar in September, from Rs 44.4 in July 2011. The consequences could have severe downstream effects not just for Corporates, but for the economy also. And the learned observation of the experts is that “the pain is avoidable, but only, if some fiscal forex discipline is soon ingrained.” Manik K. Malakar analyses the ground reality and comes up with this report...
“These are uncertain times. Uncertainty regarding the resolution of the European debt crisis and the possibility of the mighty United States of America slipping into a double-dip recession and these are wrecking havoc in the global currency and stock markets,” says Dr. VK Vijayakumar, Investment Strategist with Geojit BNP Paribas, defining the reasons behind the slipping rupee.
Other currencies too have slipped vis-à-vis the dollar. “There is a specific reason for the dollar to appreciate,” said Vijayakumar. This is because emerging markets had borrowed some 3.25 trillion dollars from European banks, which in turn have borrowed from the US money markets. When the asset quality of European banks deteriorated in the wake of the European debt crisis as also European banking stocks, lenders from the US started calling back the loans. “This created a huge demand for the dollars leading to its appreciation,” feels Vijayakumar.
But, there were domestic pressures also acting upon the rupee. “The Indian rupee has already depreciated by 11% since July, in which initially some of the depreciation was caused by Iran oil payment as also the sudden weakness by risk aversion globally,” says Uday Narayan Dubey VP, Research & Institution Business at R K Global.
And how would the rupee look like going forward and what are the pressures both domestic as well as global that would act on it? “The rupee may fall to a level
of Rs 50.50 – Rs 51.00 against the US dollar in the short-term, if the markets remain risk-averse,” says Vikash Bairoliya, Currency Analyst, Nirmal Bang. Thus, the prevailing uncertainty in global market means that the US dollar will be looked at as a safe haven asset. “On the domestic front, the RBI is likely to retain its hands-off approach in the forex market and may intervene only to contain the high volatility,” Bairoliya continued.
“We expect a further weakening in the rupee, but if the RBI intervenes, it will trade in the range of Rs. 46.50 to Rs. 49.50 till December 2011,” said Dubey. He however expects a short-term depreciation in the rupee.
Incidentally, a CRISIL Research Report expects the rupee to strengthen to Rs 45.0-46.0/USD by March 2012, from the current lows of around 50. The key assumption behind the expected recovery of the rupee is that developed economies will witness slowdown, but they will avoid another recession. In our opinion, this will lead to a pickup in FII inflows towards early 2012 as the risk appetite for investment in emerging markets returns.
Other analysts feel that the rupee slide will be even more pronounced. “We are expecting Rs 52 or maybe maximum in euphoric case on the higher side, which is equivalent to 5% to 7%. But to expect same levels by the end of 2011 or financial year 2011 is little bit difficult to say confidently,” said Shrikant Chouhan, Senior Vice President, Technical Research, Kotak Securities.
Analysts also note that a slew of negative news added to the demand for Greenbacks and that this was a distortion. In a September 22 analysis note of the dollar, Kotak Economic Research noted that concerns about the Euro have led to a ‘flight to safety’ issue and this in turn led to a dollar-supply squeeze. Analysts also noted that other safe heaven destinations; like gold; have not witnessed a similar appreciation.
The depreciating rupee will be a mixed boon for Indian companies. While some sectors like IT and exports will benefit from a sliding rupee other sectors like that of oil marketing companies will be hit. And more ominously a depreciating rupee would be negative for the Indian economy at large.
Brokerage Emkay recently conducted a survey of companies that would be affected by a sliding rupee. Graphically out of the 160 companies that they surveyed no less than 76 would be impacted by the sliding rupee, although that includes both companies that would benefit as well as those who would be hit.
“Amongst obvious gainers is Information Technology (IT) with large export revenues in dollar terms. Other sectors gaining from depreciation of the rupee are Metals (realization largely in dollar terms) and FMCG (largely translation gain owing to international operations),” Emkay said.
“The sectors experiencing negative impact are auto (being a net importer), cement (exposure to imported fuel), capital goods (being net importer) and utilities (exposure to imported fuel and foreign currency loans),” the Emkay analysiscontinued.
“A depreciating rupee tends to support the export-oriented sectors whose revenues are realized mostly in foreign currencies,” said Bairoliya. Thus, the sectors that fall in this category are IT, textiles and pharma. “However, the recent depreciation would not be highly beneficial for these sectors in the September quarter as most of the companies had hedged a big proportion of their export sales at the levels of Rs 45 to Rs 46 per dollar,” he continued. But, the next quarter could boost earnings of these companies if the rupee sustains at the current levels.
By the other side of the coin, import-oriented sectors will be hit in the wake of a falling rupee. “Since crude oil constitutes around 30% of the total import basket, oil importing companies are likely to face the brunt of the sharp depreciation of the rupee,” Bairoliya continued. However, the fall in rupee has corresponded with a fall in crude oil prices which ultimately has not led to higher crude oil prices in rupee value. Also, the companies which have dollar-denominated loans on their books are likely to incur forex losses in the current quarter.
There is some good news about the depreciating rupee on the commodity front however. India is a net importer of commodities and in normal circumstances, a depreciating rupee becomes a problem as it increases the import bills of India Inc. “But in the current scenario where the fall in rupee corresponds with lower commodity prices, the impact is very minimal,” said Bairoliya.
Chouhan of Kotak points out that a depreciating rupee would be beneficial in the long run as most of the hedged positions or speculative positions would exit and valuations would be more realistic. “A fall in crude, copper, aluminium and zinc are especially good to manage core inflation,” Chouhan said.
But for the moment it appears that corporates are at the pummelling end of rupee fluctuations and will have to just deal with it accordingly. “Advance tax figures for Q2 indicate compression in corporate earnings,” said Vijayakumar. In a year of generally weak pricing power there is generally little that companies can do at this point of time. “Hedging in the currency market can mitigate some of the pain,” he concluded.
Speaking of pain there may be some for the Indian economy caused by the depreciating rupee.
Analysts note that India has a current account deficit with slowing growth and is accompanied by worries like high inflation; the bias for the Rupee would be on the depreciating front. “The risks to the balance of payments could now emerge more from the capital account side in the event of a continued risk aversion in the global financial markets that could lead to flows back into the safe haven of the dollar and away from emerging market economies,” said Kotak analysts Indranil Pan, Suvodeep Rakshit and Shubhra Mittal in their September analysis of the sliding rupee.
But there is light at the end of the tunnel and that the pain may be short. “The Rupee has depreciated by 11% since July, we expect this sharp deprecation will last for the short term period till December 2011,” said Dubey of RK Global. “For the long term we are still bullish on Indian fundamentals and the economy so we don’t see too much deprecation in the rupee,” he said.
“In our opinion currency is going to remain under pressure because surplus money is not going to chase emerging markets and that is why it is difficult for us to expect a steep appreciation in the long run,” said Chouhan.
Vijayakumar sternly notes that discipline is the key to fiscal sanity. “The sliding rupee is likely to be a short term phenomenon. If some sanity is restored in the crisis ridden Euro land, the situation will improve and risk appetite will return,” he said. This would attract lot of capital flows to emerging markets like India.
“However, if the European political leadership fails to manage the crisis, the consequence will be a catastrophe with disastrous consequences. That will, God forbid, violently disrupt the global financial system. Let us hope for the best,” was the ominous warning from Geojot BNP Paribas’ Dr V K Vijayakumar.
A recently conducted a survey of companies by Brokerage firm Emkay on the effects of a sliding rupee reveals that “of the 160 companies that they surveyed no less than 76 would be impacted by the sliding rupee,” although that includes both companies that would benefit as well as those who would be hit. “Amongst obvious gainers is Information Technology with large export revenues in dollar terms. Other sectors gaining from depreciation of the rupee are Metals; realization largely in dollar terms and FMCG; largely translation gains owing to international operations.
The sectors experiencing negative impact are auto; being a net importer, cement; exposure to imported fuel, capital goods; being net importer and utilities; exposure to imported fuel and foreign currency loans.
There is some good news about the depreciating rupee on the commodity front however. India is a net importer of commodities and in normal circumstances, a depreciating rupee becomes a problem as it increases the import bills of India Inc. But in the current scenario where the fall in rupee corresponds with lower commodity prices, the impact is very minimal