Rupee exchange DepReciation: impact analysis

January 2012

The Associated Chambers of Commerce and Industry of India

ASSOCHAM Corporate Office: 1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498

Email: assocham@nic.in | Website: www.assocham.org

Executive Summary
The study assesses the impact of rupee depreciation on: The import bill of the country Key import commodities Rupee depreciation has pushed rupee cost of imports. Rupee cost of imports have increased by Rs. 65999 crore. Oil Imports in rupee terms have gone up by Rs. 5676.7 crore, even though Global prices oil has come down and as a result the dollar cost of imports have come down. The impact of rupee depreciation on Crude Oil imports suggests: Dollar price of Crude Oil have declined while exchange rate was depreciating. Due to depreciation of currency, domestic price of crude oil has become more costlier. Expenditure on power and fuel for industry has increased. The importers have to pay an additional Rs. 489.8 per barrel to import the same quantity of Crude Oil. The impact of rupee depreciation on Thermal Coal imports suggests: The benefit of falling commodity prices is not being transferred to the industry due to rupee depreciation. Rupee depreciation coupled with an inflexible tariff structure means that the power companies will have to suffer huge losses. The importer has to pay an additional Rs. 684.6 per tonne to import the same quantity of coal. The impact of rupee depreciation on Fertilizer imports suggests: There has been an increase in the global prices of DAP fertilizer.

Rupee Exchange Depreciation: Impact Analysis

 The depreciation of rupee has further aggravated the cost pressures on the industry. Continuous increase in the prices of imported fertilizer can also adversely impact the subsidy burden of the government. The combined effect of a depreciating rupee and an increase in dollar prices has meant that the importer has to pay an additional Rs. 3658.3 per mt. The impact of rupee depreciation on Vegetable oil imports suggests: Global prices have declined by $ 157.6 per metric tonne. However, import cost in domestic currency has increased by Rs 6941.6 metric tonne. Increase in import cost of palm oil increases the cost of production for the FMCG industry and puts pressure on their profit margin. These developments have major implications for industry and consumers as it pushes up inflation.

Rupee Exchange Depreciation: Impact Analysis

IntroductIon
he rupee has depreciated by more than 18 percent since May 2011, moreover with the rupee breaching the 53 dollar mark, profit margins of companies that import commodities or components would come under severe pressure, which could result in price increases for the consumer. The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediate products all are getting affected. Although the prices of most of the imported commodities have fallen, the depreciating rupee has meant that the importer gets no respite as they need to pay more to purchase the same quantity of raw materials. The depreciating rupee would keep the price of imported commodities elevated. Thus the industrial sector is bound to get adversely hit.

Impact of Rupee Depreciation

Primarily the consequences of weak rupee are to be felt through:

A. Increase in the Import Bill

A depreciation of the local currency results in higher import costs for the country. Failure of a similar rise being experienced in the prices of exportable commodities is going to result in a widening of current account deficit of the country.

B. Higher Inflation
Increase in import prices of essential commodities such as crude oil, fertilizer, pulses, edible oils, coal and other industrial raw materials are bound to increase the prices of the final goods. Thereby making it costlier for the consumers and hence inflation might be pushed up further.

C. Fiscal Slippage
The central government fiscal burden might increase as the hike in the prices of imported crude oil and fertilizer might warrant for a higher subsidy provision to be made for these commodities.

Rupee Exchange Depreciation: Impact Analysis

D. Increase in Cost of Borrowings

Interest rate differentials in domestic and global markets encourage the industry to raise money through foreign markets however a fall in the rupee value would negate the benefits of doing so. The next two sections of the study assess the impact of rupee depreciation on the: Import Bill of the Country Import of Key Commodities Crude Oil Thermal Coal Fertilizer Vegetable Oil

Rupee Exchange Depreciation: Impact Analysis

I. Impact on Import Bill

Table 1 looks at the import figures for Indias top ten import commodities. The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011 (Appendix). Table 2 tabulates the value of top ten import commodities in Rs. Crore thereby taking into account the exchange rate prevailing for the corresponding months (Appendix). Table 3 has been tabulated based on the scenario that the exchange rates in August and December 2011 were same to the one prevalent in April 2011 (Appendix).

A scenario analysis based on the data from the various tables indicated above suggests that: Alternative Scenarios Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs. Crore ) April 2011 160536.6 December 2011 226535.6 Increase in Import 65999.0 Bill Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs. Crore ) April 2011 160536.6 December 2011 190495.8 Increase in Import 29959.2 Bill

Note: Exchange rate during the April (44.4) and December (52.8) Source: ASSOCHAMs calculation

From the above table we can see that due to rupee depreciation import bills in the above two situations differ by Rs. 36039.8 crore. Observation: From Table 1&2 we can see that in case of Petroleum crude & products (Appendix) Import bill of petroleum crude & product have declined in international currency in December as compared to April 2011. However, in terms of domestic currency, the import has increased.

Therefore the rupee depreciation has made import of these commodities expensive.

Rupee Exchange Depreciation: Impact Analysis

II. Impact of Exchange rate on Different Commodities

Crude Oil Fig: Crude Oil (in dollars) and Rupee Depreciation

Source: IMF

Rupee was depreciating over the period of time. Dollar price of Crude have declined while exchange rate was depreciating. Due to depreciation of currency domestic price of crude oil became more costly.

Impact of Rupee depreciation

A: Impact on Companies and Consumers
A depreciating rupee makes import of Crude oil more expensive which directly leads to an increase in the operating expense of the companies. Thereby hitting their profit margins. For the consumers, a constant rise in import prices of crude oil would mean an increase in petrol prices.

Rupee Exchange Depreciation: Impact Analysis

Please refer to table below: All Industry Expense in Q2 (Growth) Second Quarter 2010-11 2011-12 Operating Expenses 19.56 22.76 Expenditure on Power and Fuel 15.67 26.79

Source: CMIE

B: Impact on importers
The global prices of Crude Oil in November 2011 were lower than that in April 2011. However, the depreciation of rupee has meant that the importer has to pay an additional Rs. 489.8 bb to import the same quantity of Crude Oil.

Please refer to table below: Table: Impact of Rupee Depreciation on Crude Oil Price Commodity Crude Oil (bb) April Nov Difference
Source: ASSOCHAMs calculation

Price $ 118.46 109.03 9.43

Exchange Rate 44.4 52.7 8.3

Price Rs 5256.1 5745.9 489.8

Rupee Exchange Depreciation: Impact Analysis

C: Impact on Import bill of Crude Oil

Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs. Crore) April 57700.0 December Increase in Import Bill 63376.7 5676.7 Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs. Crore) April 57700.0 December Decrease in Import Bill 53294.1 4405.9

Note: Exchange rate during the April (44.4) and December (52.8) Source: ASSOCHAMs calculation

From the above table we can see that the impact of rupee depreciation on the import bill of crude oil. Import bill of crude oil increased by Rs. 5676.7 crore when exchange rate was varying during the respective month. Import bill of crude oil decreased by Rs. 4405.9 crore when exchange rate was fixed during the respective month. Import value in terms of international currency has declined in December as compared to April 2011. However, in terms of domestic currency import costs of Crude oil have increased.

Rupee Exchange Depreciation: Impact Analysis

Thermal Coal Fig: Thermal Coal Price (in dollars) and Rupee Depreciation

Source: IMF

The prices of thermal coal in dollars term has been declining The Indian Rupee has been depreciating Import cost in terms of rupee has been rising The benefit of falling commodity prices is not being transferred to the industry due to rupee depreciation

Impact of Rupee Depreciation on Thermal Coal

A. Power Generating Companies
A sharp decline in the value of the rupee is bound to affect the power generation capability of power plants that are heavily dependent upon imported coal for electricity generation. This would mean an increase in the level of energy deficit in the country. Moreover, a fall witnessed in power generation capacity is likely to have an adverse affect on all the three sectors of the economy namely agriculture, industry and services.

Rupee Exchange Depreciation: Impact Analysis

Another dimension to the rupee depreciation episode is that not only has the expenditure on imports increased but this coupled with an inflexible tariff structure means that the power companies are going to suffer huge losses.

B. Impact on importers
The global prices of thermal coal in November 2011 were lower than that in May 2011. Yet, the depreciation of rupee has meant that the importer has to pay an additional Rs. 684.6 per tonne to import the same quantity of coal.

Please refer to table below: Table: Impact of Rupee Depreciation on Thermal Coal Price Commodity Thermal Coal (tonne) May Nov Difference
Source: ASSOCHAMs Calculation

Price $ 127.6 121.9 -5.7

Exchange Rate 45.0 52.7 7.7

Price Rs 5,739.5 6,424.1 684.6

C. Import Bill for Coal, coke & briquettes

With the respective exchange rates for the months of April and December 2011, the increase in import bill for coal, coke & briquettes comes out to be Rs. 4443.4 crore. Using April 2011s exchange rate to calculate the import bill for April 2011 and December 2011, the increase in import bill for coal, coke & briquettes would have been Rs.2928.3 crore. Due to rupee depreciation the import bills in the above two situation differ by Rs. 1515.1 crore.

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Rupee Exchange Depreciation: Impact Analysis

Please refer to table below: Table: Import Bill for Coal, coke & briquettes Alternative Scenarios Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs. Crore) April 2011 5079.8 December 2011 Increase in Import Bill
ASSOCHAMs calculation

Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs. Crore) April 2011 5079.8 December 2011 Increase in Import Bill 8008.1 2928.3

9523.2 4443.4

Fertilizer
A. Impact on Industry
With the Indian currency depreciating and an increase in the price of DAP (fertilizer) in international markets the import prices of fertilizer have increased and fertilizer makers have come under pressure. In such a scenario the Indian fertilizer makers have been trying hard to renegotiate the rates with their suppliers so that they can abstain from passing on the price burden to the consumers. In addition the fear of a demand contraction as well as the competition prevailing is acting as a deterrent for the fertilizer companies from raising their prices. A continuous increase in the prices of imported fertilizer can also adversely impact the subsidy burden of the government.

Sales Drop, Expenses Rise

Net sales growth rate has declined in Q2 2011 as compared to the growth seen in Q1 2011. Growth in Expenses incurred on raw materials has risen in Q2 of 2011 as compared to Q1 2011.

Rupee Exchange Depreciation: Impact Analysis

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Please refer to the chart below: Chart: Net Sales and Expenses on Raw Materials, Q1 & Q2 2011 (Growth Rates)

Source: CMIE

B. Impact on Importer
An increase in the global prices of DAP fertilizer has been witnessed between the months of May 2011 to November 2011. The depreciation of rupee has further aggravated the cost pressures on the fertilizer industry. The combined effect of a depreciation rupee and an increase in dollar prices of DAP fertilizer has meant that the importer has to pay an additional Rs. 3658.3 per mt to import the same quantity of coal. The effect of rupee depreciation becomes more evident when we see that had the rupee stayed at May 2011s level then the additional amount the importer would have to pay would have been Rs. 945 per mt. Therefore due to rupee depreciation the importers burden has increased by Rs. 2713.3 per mt.

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Rupee Exchange Depreciation: Impact Analysis

Please refer to tables below: Table: Impact of Rupee Depreciation on DAP Fertilizer Price at prevailing Exchange Rates Commodity May DAP (Fertilizer) October Difference
Source: ASSOCHAMs calculation

Price $/mt 610 631 21

Exchange Rate 45 49.3 4.3

Price Rs/ mt 27450 31108.3 3658.3

Table: Impact of Rupee Depreciation on DAP Fertilizer Price at May 2011 Exchange Rate Commodity May DAP (Fertilizer) October Difference
Source: ASSOCHAMs calculation

Price $/mt 610 631 21

Exchange Rate 45 45 0.0

Price Rs/ mt 27450 28395 945

C. Impact on Import Bill for Fertilizer Manufactured

With the respective exchange rates for the months of April and December 2011, the increase in import bill for fertilizer manufactured comes out to be Rs. 13922.1crore. Using April 2011s exchange rate to calculate the import bill for April and December 2011, the increase in import bill for fertilizer manufactured would have been Rs.11568.4 crore Due to rupee depreciation the import bills in the above two situations differ by Rs. 2353.7 crore.

Rupee Exchange Depreciation: Impact Analysis

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Please refer to table below: Import Bill for Fertilizer Manufactured Alternative Scenarios Scenario 1: Import bill valuation using Scenario 2: Import bill valuation using prevailing exchange rates for the respective April 2011exchange rates for the respective months months Value of Import Value of Import Month Month (Rs. Crore ) (Rs. Crore ) April 2011 December 2011 Increase in Import Bill 872.3 14794.4 13922.1 April 2011 December 2011 Increase in Import Bill 872.3 12440.7 11568.4

Source: ASSOCHAMs Calculation

Vegetable Oil
Fig: Vegetable Oil (in dollars) and Rupee Depreciation

Note: Vegetable Oil price have calculated on the basis of the average value of four sub-categories of vegetable oil international prices (Olive Oil, Palm oil, Soybean Oil and Sunflower oil). Source: IMF

Rupee was depreciating over the period of time. Dollar price of Vegetable Oil have declined while exchange rate was depreciating. Due to depreciation of currencies domestic price of Vegetable Oil has become more costly.

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Rupee Exchange Depreciation: Impact Analysis

Impact of rupee depreciation

A: Impact on Importer
The global prices of Vegetable Oil in November 2011 were lower than that in April 2011. Vegetable Oil global prices have declined by $ 157.6 per metric tonne. However, due to rupee depreciation the import cost in domestic currency has increased by Rs 6941.6 per metric tonne.

Please refer to table below: Table: Impact of Rupee Depreciation on Vegetable Oil Price Commodity April Vegetable Oil Nov (Metric Tonne) Difference
Source: ASSOCHAMs calculation

Price $ 1830.2 1672.7 -157.6

Exchange Rate 44.37 52.70 8.3

Price Rs 81207.9 88149.4 6941.6

B. Industry Prospects
Palm oil is used as a raw material in the FMCG industry for manufacturing soaps therefore increase in import cost of palm oil increases the cost of production and puts pressure on the profit margins of these companies. Please refer to table below: Commodity Palm Oil (Metric Tonne) April Nov Difference Price $ 1123.79 985.77 -138.2 Exchange Rate 44.37 52.70 8.3 Price Rs 49862.56 51950.08 2087.517

Source: ASSOCHAMs calculation

Rupee Exchange Depreciation: Impact Analysis

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APPENDIx
Table 1: Indias Top Ten Imports (US $ Crore) Indicator Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal, coke & briquettes Organic chemicals Iron & steel Fertilizer manufactured Metal ferrous ores & metal scrap Inorganic chemicals Imports Apr-11 1299.5 433.5 468.6 276.1 114.4 101.3 76.9 19.7 99.2 28.3 3615.7 Aug-11 1248.9 497.6 474.6 211.2 143.6 111.6 99.1 74.2 73.2 52.2 3938.7 Dec-11* 1200.3 571.2 480.7 161.5 180.4 123.0 127.8 280.2 53.9 96.1 4290.5

Source: CMIE *The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011

Table 2: Indias Import (Rs. Crore) Indicator Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal, coke & briquettes Organic chemicals Iron & steel Fertilizer manufactured Metal ferrous ores & metal scrap Inorganic chemicals Total Imports Apr-11 57700.0 19245.0 20807.3 12256.5 5079.8 4497.2 3411.9 872.3 4405.5 1256.7 160536.6 Aug-11 56827.1 22639.2 21595.4 9608.3 6536.1 5079.5 4508.7 3375.8 3328.6 2373.1 179208.3 Dec-11* 63376.7 30157.5 25380.5 8529.5 9523.2 6496.7 6746.8 14794.4 2847.9 5074.7 226535.6

Source: ASSOCHAMs calculation Note: Exchange rate during the April (44.4) and December (52.8) * The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011

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Rupee Exchange Depreciation: Impact Analysis

Table 3: Indias Import bill at April 2011s Exchange Rate (Rs Crore) Indicator April-11 August-11 December11* Aug-11 (At April Exchange Rate) 55453.3 22091.8 21073.3 9376.0 6378.1 4956.7 4399.7 3294.2 3248.2 2315.7 174875.8 Dec-11 (At April Exchange Rate) 53294.0 25359.7 21342.7 7172.5 8008.1 5463.1 5673.4 12440.7 2394.8 4267.4 190495.8

Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal, coke & briquettes Organic chemicals Iron & steel Fertiliser manufactured Metal ferrous ores & metal scrap Inorganic chemicals Total Imports

57700.0 19245.0 20807.3 12256.5 5079.8 4497.2 3411.9 872.3 4405.5 1256.7 160536.6

56827.1 22639.2 21595.4 9608.3 6536.1 5079.5 4508.7 3375.8 3328.6 2373.1 179208.3

63376.7 30157.5 25380.5 8529.5 9523.2 6496.7 6746.8 14794.4 2847.9 5074.7 226535.6

ASSOCHAMs Calculation Note: Exchange rate during the April (44.4) and December (52.8) *The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011.

HHH

Rupee Exchange Depreciation: Impact Analysis

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About ASSOCHAM
ASSOCHAM acknowledged as Knowledge Chamber of India has emerged as a forceful, pro-active, effective and forward looking institution playing its role as a catalyst between the Government and Industry. ASSOCHAM established in 1920 and has been successful in influencing the Government in shaping Indias economic, trade, fiscal and social policies which will be of benefit to the trade and industry. ASSOCHAM renders its services to over 3,50,000 members which includes multinational companies, Indias top corporates, medium and small scale units and Associations representing all the sectors of Industry. ASSOCHAM is also known as a Chamber of Chambers representing the interest of more than 350 Chambers & Trade Associations from all over India encompassing all sectors. ASSOCHAM has over 100 National Committees covering the entire gamut of economic activities in India. It has been especially acknowledged as a significant voice of Indian industry in the field of Corporate Social Responsibility, Environment & Safety, Corporate Governance, Information Technology, Agriculture, Nanotechnology, Biotechnology, Pharmaceuticals, Telecom, Banking & Finance, Company Law, Corporate Finance, Economic and International Affairs, Tourism, Civil Aviation, Infrastructure, Energy & Power, Education, Legal Reforms, Real Estate, Rural Development etc. The Chamber has its international offices in China, Sharjah, Moscow, UK and USA. ASSOCHAM has also signed MoU partnership with Business Chambers in more than 45 countries. The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office 1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498 Email: assocham@nic.in | Website: www.assocham.org