Understanding the impact of fall in rupee

It was probably one of the most volatile weeks for the rupee. The Indian currency fell past 51 per dollar on Friday for the first time in nearly 32 months. A weak trend in equity markets where foreign institutional investor participation is low. The overall demand for dollars has remained high.

During the week, the rupee lost 2.4 per cent, its biggest weekly slide in eight weeks. At the interbank foreign exchange market, the domestic currency resumed lower at Rs. 51.05/06 per dollar as against last close of Rs. 50.90/91. During the day on Friday, it dropped further to Rs. 51.41 a dollar before ending at 51.34/35 a dollar.

Currency dealers say the sustained dollar demand from banks and importers in view of firm dollar trend overseas and weak domestic equity markets are resulted in depreciation of the value of rupee.

So far in 2011, the rupee has plunged 14 per cent this making it the world's third-worst performing currency after the Turkish Lira, which is down 17 per cent, and the Kenyan Shilling that has lost 15 per cent. It is the worst performing Asian currency and the worst among all G- 20 countries.

So how does a weak rupee impact you and me?

For individuals, foreign travel gets expensive to the extent of the rupee fall. Overseas education, electronic items, goods and services imported are all expensive by 14 per cent. In case of companies, borrowing costs surge if there is no currency cover.

In case of companies, unhedged positions on external commercial borrowings have resulted in an erosion in profitability. Ranbaxy Laboratories, a large drug exporter, reported forex losses of Rs. 592 crore while Bharti Airtel, the largest cellular operator, lost Rs. 251 crore. Jet Airways, Tata Power, Shree Renuka Sugars are other companies that have reported losses due to the volatility in the forex markets.

In general, it is bad news for importers and good news for exports.

For a country like India that imports 70 per cent of its fuel it would translate into a fatter import bill for oil companies and would add to their losses.

If rupee continues to slide, then oil companies may be forced to hike petrol prices again to compensate for their losses.

A weaker currency also fuels inflation and keeps foreign investors away from stock markets.

This year foreign investors have bought only $677 million of Indian equities against $29 billion worth of net buying in 2010.

But a falling rupee boosts India's exports making them more competitive against China specifically helping sectors like software, garments and leather goods. However, India is not an export-oriented nation like Taiwan, Korea or China. Exports account for about 20 per cent of GDP while in China, exports contribute 35 per cent.

The central bank can intervene to arrest the slide. Analysts have criticized the hands off policy of the central bank. Rajeev Malik, senior economist at CLSA argued that RBI is talking too much about not intervening in the currency market.

“In RBI's case on rupee it is almost like it is an advertisement to the rest of the world that look 'if you want to short currency come to India'. I don’t know of any central bank that would openly go on saying that look we will not intervene, at a time when globally things are so uncertain,” he said.

“The inflation gets hurt a little bit but our imports would be restrained and exports would be encouraged because of the fall in the rupee,” said Rajiv Kumar, secretary general of Ficci.

The global uncertainty has meant a lot of volatility in currency markets but the rupee's fall has been dramatic. Market was abuzz with speculation that the Reserve Bank has probably asked public sector banks to release dollar to arrest the fall in rupee, so it remains to be seen what will happen to rupee in the coming days.

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