Indian rupee's descent isn't over yet
The currency has lost half
its value since touching a record high of 39.13 to a US dollar in October
2007.
Print Edition: Jul 21, 2013
PHOTO: Reuters
Sanjay Bhatia, Managing Director at Hindustan Tin Works, is a worried man these days. The exporter of tin cans says business environment has turned for the worse in recent months because of a steep drop in the rupee. Isn't a weak local currency good news for exporters such as Hindustan Tin? Usually it is. But not if they also import. Like Hindustan Tin does. The New Delhi-based company with annual revenue of Rs 300 crore says it is reducing imports of tin plate, its main raw material, and increasing local sourcing.
Besides, customers are putting pressure to cut prices as they know the company gains from a weak rupee. This is hurting its margins. "Stability is critical for business planning," says Bhatia. "Unstable situations like this disturb my cash flows." Bhatia is one of several exporters who haven't benefited much from the rupee's drop to record lows against the US dollar.
Government data show exports for the April-May period were little changed at $48.67 billion compared with $48.57 billion a year earlier. Importers have suffered too, as they need to pay more rupees for every dollar. The local currency has dropped nearly 7 per cent in June alone to breach the psychological barrier of 60 to a dollar, as foreign funds pulled $7-8 billion from the country's equity and debt markets.
The rupee's sharp slide is not a sudden development. It has lost half its value since touching a record high of 39.13 to a dollar in October 2007 on the back of massive foreign inflows. While net foreign direct investment in 2007/08 doubled to $15.89 billion, net foreign institutional investment jumped four times to $27.43 billion.
The rupee started falling in 2008 when the global economy went into a tailspin. By March 2009, the local currency had slipped to 52 versus the greenback. It strengthened over the following year as India managed to avoid the worst of the global turmoil. The bullish sentiment didn't last long, and the rupee resumed its downward trend in the second half of 2011 as the economy began to slow and the current-account deficit widened.
To be sure, the rupee is not the only emerging-market currency that is weakening. The Brazilian real, the Korean won and the Russian ruble have dropped, too. The rupee is more vulnerable because of India's high current-account deficit - the excess of imports over exports of goods, services and private transfers. The gap was 4.8 per cent of gross domestic product in 2012/13, or almost $88 billion, fuelled by higher imports of crude oil and gold.
India funds this deficit with the help of foreign inflows. But investors have pulled money from India in recent months as the local economy slows and they bet on a US economic revival after the Federal Reserve said it will gradually withdraw its stimulus package.
"We are more susceptible to knee-jerk reactions because of heavy reliance on foreign inflows in both equity and debt," says Ajay Srinivasan, CEO, Aditya Birla Financial Services Ltd. "We have no domestic sources of savings to counter a sudden outflow of funds from our financial markets."
Analysts and bankers say that currency traders have overreacted and that the government's efforts will soon support the rupee. "Global developments seem to have overshadowed many structural steps taken by the government to increase dollar inflows," says Krishnamoorthy Harihar, India treasury head at South African lender First Rand Bank. Lalit Kumar Jain, President, Confederation of Real Estate Developers Association of India, agrees. "It (the drop) is more of a panic reaction. I see the rupee stabilising at 55 to a dollar by the end of this year," he says.
Over the past year, the government has eased foreign direct investment rules in sectors including aviation and retail. It is looking to relax foreign investment rules in defence, media and telecommunications sectors.
Capital-markets regulator Securities and Exchange Board of India has eased norms for foreign institutions to invest. And the Reserve Bank of India (RBI) has lifted control over interest rates on nonresident deposits. This boosted remittances to $65 billion in 2012/13 from $43.5 billion in 2007/08.
The central bank has also relaxed rules for external commercial borrowings (ECB) in several sectors including low-cost housing and aviation. This has helped companies raise funds overseas at lower interest rates, pushing up the ratio of ECBs to total debt to more than 30 per cent in 2012 from less than 20 per cent seven years before. The pitfall is that these loans could put more pressure on the rupee at the time of repayment.
Some bankers and analysts feel the RBI has remained a mute spectator to the rupee's steep fall. "The RBI's hands are tied," says a banker on condition of anonymity. They say the RBI should have strongly intervened in the foreign-exchange market to support the local currency.
The central bank's stated position is that it intervenes in the foreign-exchange market only to reduce extreme volatility and not to defend the rupee at any particular level. Deputy Governor H.R. Khan said in late June the RBI will take all necessary steps to protect the rupee.
Still, the RBI has sold dollars on several occasions to prop up the local currency. This is evident from a fall in India's foreign exchange reserves.
Since 2007/08, the reserves have dropped almost $20 billion. More importantly, the reserves are now sufficient to meet the country's import bill for only seven months. Five years ago, the reserves were enough to cover imports for more than 14 months. While there is still some cushion, some analysts have pointed to the similarities of the current situation with the 1991 crisis when India was left with barely enough reserves to cover imports for less than a month.
Finance ministry officials deny such similarities. They say the government has taken steps to boost exports and curb imports, especially of gold, to control the current-account deficit and ease pressure on the rupee.
Gold is India's second-biggest import item after crude oil, and the government has increased the import duty on the yellow metal four-fold to eight per cent in the past two years to restrict purchases.
These measures are not enough, though, to control the rupee's slide. The solution lies in improving governance and policy making as well as introducing structural reforms in critical sectors. The moot question, says KPMG India Director Kuntal Sur, is whether India is in a position to attract foreign direct investment given the problems in land acquisition for most projects.
Some suggest selling sovereign bonds overseas to support the rupee, though the government has denied any such possibility. "A sovereign bond has the potential to create speculation that all is not well with the currency. The timing may not be right," says a treasury head at a bank. KPMG's Sur says even if the government issues sovereign bonds to raise $5 billion, it will make little difference given the massive currentaccount deficit.
So, where is the rupee headed?
Bank of America and India Forex Advisors, a foreign-exchange and treasury consultancy, predict the rupee could touch 62 if it sustains above 60 for some time and there are no serious efforts to strengthen the currency. Also, if the rupee remains at elevated levels, it will be difficult for the RBI to cut interest rates despite inflation easing.
"But monetary tightening is equally unlikely given its adverse impact on the economy," Irene Cheung, Asia forex strategist at Australia and New Zealand Banking Group, said in a recent report.
Not everyone is painting a grim picture. Credit rating firm CRISIL Ltd says the rupee will likely appreciate to 56 to a dollar by the end of March 2014. The recent capital outflow, it says, is a short-term phenomenon due to the withdrawal of stimulus measures by the US.
Clearly, estimates vary widely. The rupee's trajectory in coming months is anybody's guess. And people like Hindustan Tin's Bhatia will have to live with the uncertainties in the near future.
Additional reporting by Sanjiv Shankaran and Suprotip Ghosh
Besides, customers are putting pressure to cut prices as they know the company gains from a weak rupee. This is hurting its margins. "Stability is critical for business planning," says Bhatia. "Unstable situations like this disturb my cash flows." Bhatia is one of several exporters who haven't benefited much from the rupee's drop to record lows against the US dollar.
Government data show exports for the April-May period were little changed at $48.67 billion compared with $48.57 billion a year earlier. Importers have suffered too, as they need to pay more rupees for every dollar. The local currency has dropped nearly 7 per cent in June alone to breach the psychological barrier of 60 to a dollar, as foreign funds pulled $7-8 billion from the country's equity and debt markets.
The rupee started falling in 2008 when the global economy went into a tailspin. By March 2009, the local currency had slipped to 52 versus the greenback. It strengthened over the following year as India managed to avoid the worst of the global turmoil. The bullish sentiment didn't last long, and the rupee resumed its downward trend in the second half of 2011 as the economy began to slow and the current-account deficit widened.
| {mosimage}Anil Peshawari Managing Director, Meenu Creation EXPORTS: Readymade garments KEY MARKETS: Spain, France, UK Company revenue: Rs 185 crore 'A weak rupee impacts positively in the short term' Depreciation's impact on business: A weak rupee impacts positively in the short term. The biggest advantage is the country becomes more competitive. In the past three years, the rupee has dropped about 25 per cent while the yuan has risen nine per cent. So, some Indian products are cheaper than Chinese goods. If I can reduce prices by 10 per cent due to a weak currency, I stand a good chance of getting an order. Challenges posed by a weak rupee: India will pay more for oil imports. As diesel prices go up, the cost of raw material, overheads, transportation, chemicals, and processing of fabrics rises. Stable rupee and global growth versus depreciation and global economic uncertainty: As an exporter I would prefer global uncertainty and a weak rupee. Our rivals currencies are either going to appreciate or remain stable, whereas the rupee can fall by 10 per cent in a matter of one month. Exchange rate likely on January 1, 2014: Around Rs 64 As told to Sarika Malhotra |
To be sure, the rupee is not the only emerging-market currency that is weakening. The Brazilian real, the Korean won and the Russian ruble have dropped, too. The rupee is more vulnerable because of India's high current-account deficit - the excess of imports over exports of goods, services and private transfers. The gap was 4.8 per cent of gross domestic product in 2012/13, or almost $88 billion, fuelled by higher imports of crude oil and gold.
India funds this deficit with the help of foreign inflows. But investors have pulled money from India in recent months as the local economy slows and they bet on a US economic revival after the Federal Reserve said it will gradually withdraw its stimulus package.
"We are more susceptible to knee-jerk reactions because of heavy reliance on foreign inflows in both equity and debt," says Ajay Srinivasan, CEO, Aditya Birla Financial Services Ltd. "We have no domestic sources of savings to counter a sudden outflow of funds from our financial markets."
Analysts and bankers say that currency traders have overreacted and that the government's efforts will soon support the rupee. "Global developments seem to have overshadowed many structural steps taken by the government to increase dollar inflows," says Krishnamoorthy Harihar, India treasury head at South African lender First Rand Bank. Lalit Kumar Jain, President, Confederation of Real Estate Developers Association of India, agrees. "It (the drop) is more of a panic reaction. I see the rupee stabilising at 55 to a dollar by the end of this year," he says.
Anil Peshawari, Managing Director, Meenu Creation
Capital-markets regulator Securities and Exchange Board of India has eased norms for foreign institutions to invest. And the Reserve Bank of India (RBI) has lifted control over interest rates on nonresident deposits. This boosted remittances to $65 billion in 2012/13 from $43.5 billion in 2007/08.
The central bank has also relaxed rules for external commercial borrowings (ECB) in several sectors including low-cost housing and aviation. This has helped companies raise funds overseas at lower interest rates, pushing up the ratio of ECBs to total debt to more than 30 per cent in 2012 from less than 20 per cent seven years before. The pitfall is that these loans could put more pressure on the rupee at the time of repayment.
| {mosimage}M. Srinivas, CEO, Opto Circuits (India) EXPORTS: Medical monitors, digital thermometers KEY MARKETS: US, Europe COMPANY REVENUE: Rs 2,357 crore 'Without stability, exports will suffer' Depreciation's impact on business: We bill in dollars mostly and in euros in some cases. It is a good time to convert foreign currency into rupees. To pay for imports, we can keep this money in Exchange Earners Foreign Currency accounts. Challenges posed by a weak rupee: It is a tough call. If we have more exports than imports, then we don't have to worry much. We stand to gain. Stable rupee and global growth versus depreciation and global economic uncertainty: We prefer a stable rupee and global growth. Without stability, exports will suffer. Exchange rate likely on January 1, 2014: Rs 50-52. As told to K.R. Balasubramanyam |
Some bankers and analysts feel the RBI has remained a mute spectator to the rupee's steep fall. "The RBI's hands are tied," says a banker on condition of anonymity. They say the RBI should have strongly intervened in the foreign-exchange market to support the local currency.
The central bank's stated position is that it intervenes in the foreign-exchange market only to reduce extreme volatility and not to defend the rupee at any particular level. Deputy Governor H.R. Khan said in late June the RBI will take all necessary steps to protect the rupee.
Still, the RBI has sold dollars on several occasions to prop up the local currency. This is evident from a fall in India's foreign exchange reserves.
| {mosimage}Manish Gulati, General Manager (Exports), HEG EXPORTS: Graphite electrodes KEY MARKETS: Middle East, Europe, Southeast Asia, Africa COMPANY REVENUE: Rs 1,600 cr 'A stable environment is always better' Depreciation's impact on business: Apart from helping us stay afloat, there isn't much gain because we also import raw material used for manufacturing graphite electrodes. Challenges posed by a weak rupee: Not many. It is just exports minus imports. Stable rupee and global growth versus depreciation and global economic uncertainty: Volatility is not welcome at all. It makes predictions very difficult. A stable environment is always better. Exchange rate likely on January 1, 2014: Can't say. As told to Taslima Khan |
| {mosimage} BT RETRO Business Today has been continuously tracking the rupee's fall. In a July 7 story 'Painful Tumble' , BT said the slide will likely hurt India's economic recovery |
Gold is India's second-biggest import item after crude oil, and the government has increased the import duty on the yellow metal four-fold to eight per cent in the past two years to restrict purchases.
These measures are not enough, though, to control the rupee's slide. The solution lies in improving governance and policy making as well as introducing structural reforms in critical sectors. The moot question, says KPMG India Director Kuntal Sur, is whether India is in a position to attract foreign direct investment given the problems in land acquisition for most projects.
Some suggest selling sovereign bonds overseas to support the rupee, though the government has denied any such possibility. "A sovereign bond has the potential to create speculation that all is not well with the currency. The timing may not be right," says a treasury head at a bank. KPMG's Sur says even if the government issues sovereign bonds to raise $5 billion, it will make little difference given the massive currentaccount deficit.
So, where is the rupee headed?
Bank of America and India Forex Advisors, a foreign-exchange and treasury consultancy, predict the rupee could touch 62 if it sustains above 60 for some time and there are no serious efforts to strengthen the currency. Also, if the rupee remains at elevated levels, it will be difficult for the RBI to cut interest rates despite inflation easing.
"But monetary tightening is equally unlikely given its adverse impact on the economy," Irene Cheung, Asia forex strategist at Australia and New Zealand Banking Group, said in a recent report.
Not everyone is painting a grim picture. Credit rating firm CRISIL Ltd says the rupee will likely appreciate to 56 to a dollar by the end of March 2014. The recent capital outflow, it says, is a short-term phenomenon due to the withdrawal of stimulus measures by the US.
Clearly, estimates vary widely. The rupee's trajectory in coming months is anybody's guess. And people like Hindustan Tin's Bhatia will have to live with the uncertainties in the near future.
| {mosimage}Prashant Sabharwal, Director, Pacific Global Exports EXPORTS: Leather garments KEY MARKETS: Europe, Australia COMPANY REVENUE: Rs 7 crore 'Raw material imports are severely affected' Depreciation's impact on business: About 80 per cent of our expenditure is on imports of raw leather. We have cut imports in the past two months. Also, foreign trips for participating in exhibitions have become costlier. If we cut down on exhibitions, we will not get any business. Challenges posed by a weak rupee: A falling rupee will be a dampener as raw material imports are severely affected. Stable rupee and global growth versus depreciation and global economic uncertainty: We cannot plan our expenditure in procuring raw material unless the rupee is stable. Exchange-rate projection: By next month, the rupee can fall to 61-61.5 to a dollar. As told to Taslima Khan |
Additional reporting by Sanjiv Shankaran and Suprotip Ghosh
