Topic of the week for discussion: 21st to 27th May 2012

Topic : Rupee depreciation

The rupee is under attack. Indian Rupee, last Friday, nearly breached the Rs 50 per dollar mark and closed at 49.90 - its weakest since May 14, 2009. Since July 27, when the Rupee was at Rs 43.85 a dollar, it has lost 10.21 per cent or Rs 6.05 against dollar due to sustained dollar demand from banks and importers in view of the firm dollar sentiment in the New York market. The rupee, on Monday, plunged below the psychological 55-level to close at an all-time low of 55.03 against the dollar amid robust demand for the U.S. currency from banks and importers, but there was no visible Reserve Bank of India (RBI) action to shore up the domestic unit from its record low levels. At the inter-bank foreign exchange market, the rupee opened slightly lower at 54.45 a dollar from last weekend's close of 54.42 and immediately touched a high of 54.44. However, it soon started falling and at the fag-end trading breached the crucial 55-level and closed at 55.03, a fall of 61 paise or 1.12 per cent from its previous close. Rupee breaching 55 is a bit of worry as this has been seen as a strong resistance level. However, we expect the government to come up with some measures, which will help the domestic currency to pull back from the current levels, said N. S. Venkatesh, Head of Treasury, IDBI Bank. It is a matter of great concern. We are watching the situation. The Centre is not (sitting) idle. We are trying to resolve (the issue), Mr. Mukherjee had told reporters in Kolkata. Historically, the Indian Rupee has been depreciating roughly in line with the fall in its Purchasing Power Parity (PPP) since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was Rs 9.30 per US Dollar. It is the inflation that negatively impacts PPP and pushes a currency down. But the present spike was rather sharp on the back of debt default concern in the euro zone and after the downgrading of two largest French banks, besides Lloyds Insurance withdrawing its deposits from European banks have led to euro losing its value against dollar. As large banks, investors and financial institutions started selling euro and bought dollar, the latter appreciated against all major currencies including rupee.

Topic Introduction

http://economictimes.indiatimes.com/tech/ites/falling-rupee-it-companies-worried-over-currencyvolatility/articleshow/13360646.cms http://www.deccanherald.com/content/193602/falling-rupee-adds-fuel-indias.html http://articles.economictimes.indiatimes.com/2012-05-18/news/31765614_1_rupee-positive-fallout

One school of thought is that unlike its Asian peers, the RBI could not have intervened in a big way in the currency markets with its fragile holding of foreign exchange reserves. With FII flows too coming down, the pressure got accentuated and rupee breached the 50-mark. Moreover, the global volatilities are bound to have an impact in the entire Asian markets, including, India, pointed out Birla Sun Life Mutual Fund CEO A Balasubramanian. The rupee weakness is basically due to the European crisis and has nothing to do with the domestic economy, added HDFC Banks head of forex operations. Positive Impact When a currency depreciates, the exporters rejoice because they get more of the local currency for every unit of foreign currency though the quantum of trade remains unchanged. But this time, many exporters were caught off guard. For one, there is little dollar supply in the market as most exporters seem to have covered themselves in the Rs 45-46 range. Sudden changes in the position of the rupee do not really matter much. Exporters these days resort to hedging against such risks (of volatility), said the Federation of India Export Organisations (FIEO) chief Ramu Deora. Besides, the buyers overseas also renegotiate and push rates down. The depreciating rupee will be positive for the Indian IT sector who generate more than 80-90 per cent of their $70 billion revenue from the overseas markets and this kind of appreciation in foreign currency will enhance their actual realisation of revenue in dollar terms. Every one per cent change in rupee-dollar has a 40 basis points impact on the margins on the net profit numbers of IT services companies like TCS, Infosys, HCL to mention a few. Individually, expatriates living outside India too gain by rupee depreciation. In fact, the expat Indians understand the currency movement lot better than the resident Indians. Negative Impact When a currency loses its value it creates many problems for the economy. It leads to high inflation, as India imports around 70 per cent of its crude oil requirement and the government will have to pay more for it in rupee terms. On the other hand, India Inc will also have to pay more in rupee terms for procuring their raw materials, despite drop in global commodity prices, only because of a depreciating rupee against dollar. Already, oil companies cited the fall in the rupee value to the dollar to increase petrol prices recently. Just like oil, all products and commodities are more expensive to import now. Corporates, who have foreign currency loans on their books, also take a view that despite a depreciating rupee, keeping the benign interest rates in developed markets would be lot better to hold on to foreign currency debt as one gets 0-2 per cent interest on dollar debt compared with 12-14 per cent on rupee debt. Individually, traveling abroad becomes more expensive as travel cost can go up by at least 10 per cent. Students studying abroad too will be hit as more rupee will go out to pay for the courses and stay. Depreciation of rupee also affects the money flow in the Indian stock markets. FIIs, the main investors in the Indian equity markets, also start withdrawing their investments from the markets fearing loss of value. In terms of portfolios, if you hold stocks in oil and gas, infrastructure, fertiliser or tyre business, your returns will take a hit as the shares of these companies will fall when the rupee falls as they procure their raw materials from abroad. On the other hand stocks of Information Technology (IT) companies and export-oriented units should do better.

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