Rupee Exchange Depreciation Impact Analysis-2012

Rupee exchange DepReciation:

impact analysis

The Associated Chambers of Commerce and Industry of IndiaASSOCHAM Corporate Office:

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

Email: [email protected] | Website: www.assocham.org

January 2012

Rupee Exchange Depreciation: Impact Analysis 1

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,eventhoughGlobalpricesoilhascomedownandasaresultthedollarcostofimportshavecomedown.

• Theimpact of rupee depreciation on Crude Oil importssuggests:

Dollar price of Crude Oil have declined while exchange rate wasdepreciating.

Due to depreciation of currency, domestic price of crude oil has become more costlier.

Expenditureonpowerandfuelforindustryhasincreased.

The importers have to pay an additional Rs. 489.8 per barrel to import the same quantity of Crude Oil.

• Theimpact of rupee depreciation on Thermal Coal importssuggests:

The benefit of falling commodity prices is not being transferred to the industryduetorupeedepreciation.

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 toimportthesamequantityofcoal.

• Theimpact of rupee depreciation on Fertilizer importssuggests:

TherehasbeenanincreaseintheglobalpricesofDAPfertilizer.

Rupee Exchange Depreciation: Impact Analysis2

Thedepreciationofrupeehasfurtheraggravatedthecostpressuresontheindustry.

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.

• Theimpact of rupee depreciation on Vegetable oil imports suggests:

Global prices have declined by $ 157.6 per metric tonne.

However,importcostindomestic currency has increased by Rs 6941.6 metric tonne.

Increase in import cost of palm oilincreasesthecostofproductionfortheFMCG industryandputs pressure on their profit margin.

• Thesedevelopmentshavemajorimplicationsforindustryandconsumersasitpushesupinflation.


IntroductIon

Therupeehasdepreciatedbymorethan18percentsinceMay2011,moreoverwiththe rupee breaching the 53 dollar mark, profit margins of companies that importcommoditiesorcomponentswouldcomeunderseverepressure,whichcouldresult inpriceincreasesfortheconsumer.

Therupeedepreciationwillparticularlyhittheindustrialsectorandputhigherpressureon theircostsas items likeoil, importedcoal,metalsandminerals, imported industrialintermediateproductsallaregettingaffected.

Although thepricesofmostof the importedcommoditieshave fallen, thedepreciatingrupeehasmeantthattheimportergetsnorespiteastheyneedtopaymoretopurchasethesamequantityofrawmaterials.

Thedepreciatingrupeewouldkeepthepriceofimportedcommoditieselevated.Thustheindustrialsectorisboundtogetadverselyhit.

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.


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:

• ImportBilloftheCountry

• ImportofKeyCommodities

Crude Oil

Thermal Coal

Fertilizer

Vegetable Oil


I. Impact on Import Bill

• Table 1 looks at the import figures for India’s 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 Scenario’s

Scenario 1: Import bill valuation using prevailing exchange rates for the respective months

Scenario 2: Import bill valuation using April 2011exchange rates for the respective months

Month Value of Import (Rs. Crore )

Month Value of Import (Rs. Crore )

April 2011 160536.6 April 2011 160536.6December 2011 226535.6 December 2011 190495.8Increase in Import Bill

65999.0 Increase in Import Bill

29959.2

Note:ExchangerateduringtheApril(44.4)andDecember(52.8)Source:ASSOCHAM’scalculation

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.


II. Impact of Exchange rate on Different Commodities

Crude Oil

Fig: Crude Oil (in dollars) and Rupee Depreciation

Source:IMF

• Rupeewasdepreciatingovertheperiodoftime.

• DollarpriceofCrudehavedeclinedwhileexchangeratewasdepreciating.

• Due to depreciation of currency domestic price of crude oil became morecostly.

Impact of Rupee depreciation

A: Impact on Companies and Consumers

• AdepreciatingrupeemakesimportofCrudeoilmoreexpensivewhichdirectlyleadsto 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 wouldmean anincrease in petrol prices.


Please refer to table below:

All Industry Expense in Q2 (Growth)

Second Quarter Operating Expenses Expenditure on Power and Fuel

2010-11 19.56 15.67

2011-12 22.76 26.79

Source:CMIE

B: Impact on importers

• TheglobalpricesofCrudeOilinNovember2011werelowerthanthatinApril2011.

• 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.


Table: Impact of Rupee Depreciation on Crude Oil Price

Commodity Price $ Exchange Rate Price Rs

Crude Oil (bb) April 118.46 44.4 5256.1

Nov 109.03 52.7 5745.9

Difference – 9.43 8.3 489.8

Source:ASSOCHAM’scalculation


C: Impact on Import bill of Crude Oil



Month Value of Import (Rs. Crore)


April 57700.0 April 57700.0

December 63376.7 December 53294.1

Increase in Import Bill

5676.7 Decrease in Import Bill

4405.9

Note:ExchangerateduringtheApril(44.4)andDecember(52.8)


From the above table we can see that the impact of rupee depreciation on the import bill of crude oil.

• ImportbillofcrudeoilincreasedbyRs.5676.7crorewhenexchangeratewasvarying during the respective month.

• ImportbillofcrudeoildecreasedbyRs.4405.9crorewhenexchangeratewasfixed during the respective month.

• Importvalue in termsof internationalcurrencyhasdeclined inDecemberas compared to April 2011.

• However, in terms of domestic currency import costs of Crude oil haveincreased.


Thermal Coal

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

Source:IMF

• Thepricesofthermalcoalindollarstermhasbeendeclining

• TheIndianRupeehasbeendepreciating

• Importcostintermsofrupeehasbeenrising

• Thebenefitoffallingcommoditypricesisnotbeingtransferredtotheindustrydue 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.


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

• Theglobalpricesof thermalcoal inNovember2011were lower than that inMay2011.

• 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.


Table: Impact of Rupee Depreciation on Thermal Coal Price


Thermal Coal (tonne) May 127.6 45.0 5,739.5

Nov 121.9 52.7 6,424.1

Difference -5.7 7.7 684.6

Source:ASSOCHAM’sCalculation

C. Import Bill for Coal, coke & briquettes

• WiththerespectiveexchangeratesforthemonthsofAprilandDecember2011,the increase in import bill for coal, coke & briquettes comes out to be Rs. 4443.4 crore.

• UsingApril2011’sexchangeratetocalculatetheimportbillforApril2011andDecember 2011, the increase in import bill for coal, coke & briquettes would have been Rs.2928.3 crore.

• DuetorupeedepreciationtheimportbillsintheabovetwosituationdifferbyRs. 1515.1 crore.



Table: Import Bill for Coal, coke & briquettes Alternative Scenario’s





April 2011 5079.8 April 2011 5079.8

December 2011 9523.2 December 2011 8008.1


4443.4 Increase in Import Bill

2928.3

ASSOCHAM’scalculation

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

• NetsalesgrowthratehasdeclinedinQ22011ascomparedtothegrowthseeninQ12011.

• GrowthinExpensesincurredonrawmaterialshasriseninQ2of2011ascomparedtoQ12011.


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

• AnincreaseintheglobalpricesofDAPfertilizerhasbeenwitnessedbetweenthemonths of May 2011 to November 2011.

• Thedepreciationofrupeehasfurtheraggravatedthecostpressuresonthefertilizerindustry.

• 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 2011’s 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.


Please refer to tables below:

Table: Impact of Rupee Depreciation on DAP Fertilizer Price at prevailing Exchange Rates

Commodity Price $/mt Exchange Rate Price Rs/ mt

DAP (Fertilizer)

May 610 45 27450

October 631 49.3 31108.3

Difference 21 4.3 3658.3


Table: Impact of Rupee Depreciation on DAP Fertilizer Price at May 2011 Exchange Rate

Commodity Price $/mt Exchange Rate Price Rs/ mt

DAP (Fertilizer)

May 610 45 27450

October 631 45 28395

Difference 21 0.0 945


C. Impact on Import Bill for Fertilizer Manufactured

• With the respective exchange rates for the months of April and December2011, the increase in import bill for fertilizer manufactured comes out to be Rs. 13922.1crore.

• Using April 2011’s exchange rate to calculate the import bill for April andDecember 2011, the increase in import bill for fertilizer manufactured would have been Rs.11568.4 crore

• DuetorupeedepreciationtheimportbillsintheabovetwosituationsdifferbyRs. 2353.7 crore.



Import Bill for Fertilizer Manufactured Alternative Scenario’s



MonthValue of Import

(Rs. Crore )Month

Value of Import (Rs. Crore )

April 2011 872.3 April 2011 872.3

December 2011 14794.4 December 2011 12440.7


13922.1Increase in Import Bill

11568.4

Source:ASSOCHAM’sCalculation

Vegetable OilFig: 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 wasdepreciating.

• DuetodepreciationofcurrenciesdomesticpriceofVegetableOilhasbecomemore costly.


Impact of rupee depreciation

A: Impact on Importer

• TheglobalpricesofVegetableOilinNovember2011werelowerthanthatinApril2011.

• 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.


Table: Impact of Rupee Depreciation on Vegetable Oil Price


Vegetable Oil (Metric Tonne)

April 1830.2 44.37 81207.9

Nov 1672.7 52.70 88149.4

Difference -157.6 8.3 6941.6


B. Industry Prospects

PalmoilisusedasarawmaterialintheFMCGindustryformanufacturingsoapsthereforeincrease in import cost of palm oil increases the cost of production and puts pressure on the profit margins of these companies.



Palm Oil (Metric Tonne)

April 1123.79 44.37 49862.56

Nov 985.77 52.70 51950.08

Difference -138.2 8.3 2087.517



APPENDIx

Table1:India’sTopTenImports(US$Crore)

Indicator Apr-11 Aug-11 Dec-11*

Petroleum crude & products 1299.5 1248.9 1200.3

Capital goods 433.5 497.6 571.2

Gold&silver 468.6 474.6 480.7

Pearls precious & semiprecious stones 276.1 211.2 161.5

Coal, coke & briquettes 114.4 143.6 180.4

Organic chemicals 101.3 111.6 123.0

Iron & steel 76.9 99.1 127.8

Fertilizer manufactured 19.7 74.2 280.2

Metal ferrous ores & metal scrap 99.2 73.2 53.9

Inorganic chemicals 28.3 52.2 96.1

Imports 3615.7 3938.7 4290.5

Source:CMIE*TheimportvalueforthemonthofDecember2011hasbeencalculatedusingtherateofgrowthobservedbetweenthemonthsAprilandAugust2011

Table 2: India’s Import (Rs. Crore)

Indicator Apr-11 Aug-11 Dec-11*

Petroleum crude & products 57700.0 56827.1 63376.7

Capital goods 19245.0 22639.2 30157.5

Gold&silver 20807.3 21595.4 25380.5

Pearls precious & semiprecious stones 12256.5 9608.3 8529.5

Coal, coke & briquettes 5079.8 6536.1 9523.2

Organic chemicals 4497.2 5079.5 6496.7

Iron & steel 3411.9 4508.7 6746.8

Fertilizer manufactured 872.3 3375.8 14794.4

Metal ferrous ores & metal scrap 4405.5 3328.6 2847.9

Inorganic chemicals 1256.7 2373.1 5074.7

Total Imports 160536.6 179208.3 226535.6

Source:ASSOCHAM’scalculationNote:ExchangerateduringtheApril(44.4)andDecember(52.8)*TheimportvalueforthemonthofDecember2011hasbeencalculatedusingtherateofgrowthobservedbetweenthemonthsAprilandAugust2011


Table 3: India’s Import bill at April 2011’s Exchange Rate (Rs Crore)

Indicator April-11 August-11 December-11*

Aug-11 (At April

Exchange Rate)

Dec-11 (At April

Exchange Rate)

Petroleum crude & products

57700.0 56827.1 63376.7 55453.3 53294.0

Capital goods 19245.0 22639.2 30157.5 22091.8 25359.7Gold&silver 20807.3 21595.4 25380.5 21073.3 21342.7Pearls precious & semiprecious stones

12256.5 9608.3 8529.5 9376.0 7172.5

Coal, coke & briquettes

5079.8 6536.1 9523.2 6378.1 8008.1

Organic chemicals 4497.2 5079.5 6496.7 4956.7 5463.1Iron & steel 3411.9 4508.7 6746.8 4399.7 5673.4Fertiliser manufactured

872.3 3375.8 14794.4 3294.2 12440.7

Metal ferrous ores & metal scrap

4405.5 3328.6 2847.9 3248.2 2394.8

Inorganic chemicals 1256.7 2373.1 5074.7 2315.7 4267.4Total Imports 160536.6 179208.3 226535.6 174875.8 190495.8ASSOCHAM’sCalculationNote:ExchangerateduringtheApril(44.4)andDecember(52.8)*TheimportvalueforthemonthofDecember2011hasbeencalculatedusingtherateofgrowthobservedbetweenthemonthsAprilandAugust2011.

HHH

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The Associated Chambers of Commerce and Industry of IndiaASSOCHAM Corporate Office

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

Email: [email protected] | Website: www.assocham.org

Rupee Exchange Depreciation Impact Analysis-2012

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