How will the rupee’s fall affect you?

 

The finance minister and other government officials may try to reduce the importance of this sudden development by blaming it on an appreciating dollar. However, as is evident from the chart (Rupee vs the dollar index), the strengthening dollar only partially explains this phenomenon. Though the correlation between the two currencies was strong till October and the rupee weakened as the dollar rose, it has changed after that. When the dollar index lost some of its steam during October, the rupee refused to gain. The rupee continued with its weakness once again when the dollar index showed a small improvement in November. While the dollar index is still below its recent peak, which it achieved on 4 October, the rupee weakened from 49.40 to 52.37 now-an additional loss of 6%. 

 

Due to the structural problems in the US, all market players assumed that the dollar would weaken further, and so almost everyone was on the 'short' side. This is why a sudden jump in the dollar, triggered by the sovereign debt crisis in Europe, took everyone by surprise. "Since the rupee has been relatively stable in the past two years, most importers kept their positions open to avoid paying a forward premium," explains Jamal Mecklai, CEO of Mecklai Financial Services. 

 

Similarly, several companies that have foreign debt in the form of ECB/FCCB kept their positions open. The immediate trigger for this massive rupee depreciation can be traced to the mad rush to cover these open positions. Several exporters, who would have benefited from the rupee depreciation, were also caught on the wrong foot since most of them had already sold their future dollar earnings. This is the reason that they are also in the market to square off their positions, that is, to buy dollars. 

 

 

It is not just the technical factors that are to blame; domestic fundamentals are also in a bad shape. These include rising inflation, huge fiscal deficit, high interest rates, tight liquidity and reducing growth rate. The situation worsened recently because of the reduced capital flow. Unlike other emerging markets, India doesn't have trade surplus and is, therefore, more dependent on capital inflows. 

 

The stock market/forex market analysts have started wondering what is triggering the slide now. Is the stock market crash pulling down the rupee or is it the weakening rupee that is dragging the stock market down? Even as they try to figure out this conundrum, one thing is certain. Since FIIs count their investments in dollars, it is a double whammy for them when the stock markets slide and the rupee depreciates simultaneously. "We are in a mess now because we are financing our trade deficit with FII money," says Rohit Pahwa, forex dealer at Batliwala & Karani. 

 

 

After leaving it to the market forces in the initial stage, the RBI has finally decided to stem the one-way move of the rupee. The measures to increase dollar supply included relaxation in FII investment norms, asking corporates to bring back all the proceeds of foreign debt raised for domestic use, and increasing the all-in cost ceilings for borrowings up to five years from 3% over six months LIBOR rate to 3.5% over six months LIBOR rate (this is the rate at which banks can borrow money from each another). Some other steps that have been taken are removing the $100 million cap for selling foreign currency-rupee swaps and a 25-100 basis point increase in interest on foreign currency deposits. 

 

To stem the relenting dollar demand in the domestic forex market, the RBI has also opened a direct window for oil marketing companies through PSU banks. Though most measures are long term in nature, they have helped arrest the immediate slide. "Without some of these measures, the rupee would have posted another historic low above 53.50," says Moses Harding, executive VP and head, global markets group, IndusInd Bank. However, the RBI's ability to directly interfere in the market and dictate its direction is restricted because of limited dollar reserves in its balance sheet and the prevailing tight liquidity in the system. Any aggressive dollar selling by the RBI in the spot market will squeeze the rupee liquidity further, taking the call money rates to much higher levels. If the RBI tries to cool the liquidity crunch with large open market operations (OMO), it may aggravate inflation once again. 

 

 

"We have already shifted into a new short-term range of Rs 51-56/dollar. After hitting immediate targets of 53.50-54 and 54.75-55.25, the rupee may go down further to 56-56.25 to complete its bear run," says Harding. So, while some RBI measures prevented things moving from bad to worse, reversing the trend is not going to be easy because of the weak fundamental and structural dynamics of the domestic and global economy. "As the fundamentals are weak, investors will sell into any short-term strength in the rupee, taking it further to 55-56 in the next two months," says Pahwa. 

 

If the rupee depreciates further, it could spell trouble for the Indian working class, which is already reeling under high inflation. Your spending plans may get affected and your finances may be left in a disarray. Your household budget and investments will need to be revised. Here is how you could be affected. 

 

 

 

For stock market investors, the weakening rupee hurts on several fronts. Companies with significant foreign currency borrowings or those which import raw material from abroad will take a severe hit. These firms will have to shell out more rupees to repay every dollar borrowed as well as spend more rupees on imported raw materials. This will hurt their profitability. In the September quarter earnings season, we have seen how India Inc's profitability has been significantly eroded due to mark-to-market (MTM) hit taken on foreign currency exposure. It is expected that this quarter will see even higher MTM losses for some firms. The weakness in the rupee also dampens FII sentiment as the value of their investments (in dollar terms) erodes, which may prompt them to pull out more money from the markets. 

 

 

If you plan to go on a foreign vacation soon, it would be better if you defer for now. With every fall in the rupee, travelling abroad becomes more expensive as one has to fork out more in rupee terms for every dollar spent. Already, foreign tour operators have jacked up their prices for tour packages by 20-25%. You may also have to spend more on your travel insurance. Even if you have booked the foreign tour package in advance, you may need to furnish the differential amount, to the extent the rupee slides against the dollar. If you are still keen on vacationing abroad, make sure you carry enough spare cash to cover the inflated expenditure. 

 

 

Your desire to own the latest gadget may cost you more than that you budgeted for. As most imported goods are billed in dollars, Indian consumers are likely to see the prices of their favourite imported goods inch up further. It is expected that prices of all imported white goods, such as refrigerators, microwaves, mobile phones, laptops, etc, will witness a spike in the near term. Dharmakirti Joshi, chief economist at Crisil, says, "The sharp rise in the cost of imports is bound to be reflected in the prices of all such goods." 

 

Also, the companies which import inputs in large quantities will be forced to hike prices for the end-consumer. This means that car and two-wheeler manufacturers could realign the prices for their offerings. The area where consumers will feel the pinch is the spike in fuel prices. With the declining rupee, the crude oil import bill for the government has also gone up, forcing it to jack up petrol prices. Any further fall in the rupee will lead to further hikes, especially as global crude oil prices are not letting up. Consequently, the prices of most food items will also go up as the cost of transportation rises. 

 

 

Indian students keen to earn a foreign degree will have to shell out more to fulfil their dreams. Given the sharp decline in the rupee, they will have to incur higher expenditure in rupee terms to cover their tuition fees, food, stay and other living expenses. This will add to the high cost of education overseas. Says SP Dhanapal, CEO of Sudha NRI Consultants: "Students going abroad for education will surely have to factor in at least a 10-15% rise in costs." 

 

Those who have taken an education loan to pay for the foreign education will have to bear a higher burden as the loan requirement will shoot up to that extent. Some may be forced to take a top-up on existing loans, which means that they will have to repay more. 

 

 

Some people might actually stand to gain from the massive slide in the rupee. Among these are NRIs, exporters, those who have invested in gold as well as international funds and, perhaps, even the hospitality industry. 

 

 

The families of individuals working abroad will be a happy lot. Non-resident Indians remitting money back home will be effectively putting more money into their wallets as they will get more rupees for every dollar remitted. For instance, a family receiving remittances of $5,000 a month will now get Rs 2.6 lakh in their hands at Rs 52/dollar instead of Rs 2.25 lakh at Rs 45/dollar earlier. Dhanapal says that the rupee slide will bring cheer to the nearly 2 crore families of NRIs in the country. "Bulk remittances will witness a rise as NRIs take advantage of the rupee-dollar movement," he adds.

 

 

Not everything is gloom and doom in the investment space. Within the stock universe, export-oriented companies and those with significant foreign currency revenues will benefit from the rupee decline. This is because they will earn more rupees for every dollar worth of goods sold or assets held. As such, IT services firms and textiles manufacturers will get a boost in their earnings. However, the exporters who have already hedged their receivables at lower levels will not benefit much from the rupee slide. 

 

Domestic gold prices are likely to receive a further boost due to the declining rupee. If gold is already a part of your portfolio, you too will benefit from the price appreciation. Joshi says, "Since the cost of importing gold is inching upwards, it may fuel the domestic gold prices." Apart from these, individuals who have invested in global funds will experience a surge in their returns, even if the fund NAV does not rise much. Those with real estate assets abroad or foreign currency savings accounts will also benefit. 

 

 

Another beneficiary of the falling rupee is the tourism industry. Foreigners may be tempted to visit the country as they will have to shell out fewer dollars to enjoy a vacation here. So, hotels and tour operators could stand to gain from a possible influx of tourists.

Source: Economic Times