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Topic

Introduction

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 Rs50 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 percent or Rs 6.05 against dollar due to sustained dollar demand from banksand importers in view of the firm dollar sentiment in the New York market.

The rupee, on Monday, plunged below the psychological 55-level to closeat an all-time low of 55.03 against the dollar amid robust demand for theU.S. currency from banks and importers, but there was no visible ReserveBank of India (RBI) action to shore up the domestic unit from its record lowlevels.

At the inter-bank foreign exchange market, the rupee opened slightly lowerat 54.45 a dollar from last weekend's close of 54.42 and immediatelytouched a high of 54.44.

However, it soon started falling and at the fag-end trading breached thecrucial 55-level and closed at 55.03, a fall of 61 paise or 1.12 per cent fromits previous close.

Rupee breaching 55 is a bit of worry as this has been seen as a strongresistance level. However, we expect the government to come up with somemeasures, which will help the domestic currency to pull back from thecurrent levels, said N. S. Venkatesh, Head of Treasury, IDBI Bank.

It is a matter of great concern. We are watching the situation. The Centreis not (sitting) idle. We are trying to resolve (the issue), Mr. Mukherjeehad told reporters in Kolkata.

Historically, the Indian Rupee has been depreciating roughly in line withthe fall in its Purchasing Power Parity (PPP) since the early 1980s. Whilethe PPP was 15 around 1982, the actual exchange rate was Rs 9.30 per USDollar. It is the inflation that negatively impacts PPP and pushes a currencydown.

But the present spike was rather sharp on the back of debt default concernin the euro zone and after the downgrading of two largest French banks,besides Lloyds Insurance withdrawing its deposits from European bankshave led to euro losing its value against dollar. As large banks, investorsand financial institutions started selling euro and bought dollar, the latterappreciated against all major currencies including rupee.

http://economictimes.indiatimes.com/tech/ites/falling-rupee-it-companies-worried-over-currency-

volatility/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

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

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Effects

One school of thought is that unlike its Asian peers, the RBI could not have intervenedin a big way in the currency markets with its fragile holding of foreign exchangereserves.

With FII flows too coming down, the pressure got accentuated and rupee breached the50-mark. Moreover, the global volatilities are bound to have an impact in the entireAsian markets, including, India, pointed out Birla Sun Life Mutual Fund CEO A

Balasubramanian. The rupee weakness is basically due to the European crisis and hasnothing to do with the domestic economy, added HDFC Banks head of forexoperations.Positive ImpactWhen a currency depreciates, the exporters rejoice because they get more of the localcurrency for every unit of foreign currency though the quantum of trade remainsunchanged. But this time, many exporters were caught off guard. For one, there is littledollar supply in the market as most exporters seem to have covered themselves in theRs 45-46 range. Sudden changes in the position of the rupee do not really mattermuch.

Exporters these days resort to hedging against such risks (of volatility), said theFederation 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 than80-90 per cent of their $70 billion revenue from the overseas markets and this kind ofappreciation in foreign currency will enhance their actual realisation of revenue indollar terms. Every one per cent change in rupee-dollar has a 40 basis points impact onthe margins on the net profit numbers of IT services companies like TCS, Infosys, HCLto mention a few.

Individually, expatriates living outside India too gain by rupee depreciation. In fact, theexpat 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 tohigh inflation, as India imports around 70 per cent of its crude oil requirement and thegovernment 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 procuringtheir raw materials, despite drop in global commodity prices, only because of adepreciating rupee against dollar. Already, oil companies cited the fall in the rupeevalue 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 thatdespite a depreciating rupee, keeping the benign interest rates in developed marketswould be lot better to hold on to foreign currency debt as one gets 0-2 per cent intereston dollar debt compared with 12-14 per cent on rupee debt.

Individually, traveling abroad becomes more expensive as travel cost can go up by atleast 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, themain investors in the Indian equity markets, also start withdrawing their investmentsfrom the markets fearing loss of value. In terms of portfolios, if you hold stocks in oiland gas, infrastructure, fertiliser or tyre business, your returns will take a hit as theshares of these companies will fall when the rupee falls as they procure their rawmaterials from abroad. On the other hand stocks of Information Technology (IT)

companies and export-oriented units should do better.