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Rupee’s Depreciation

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July 23, 2022

Why in news?

The Indian rupee is experiencing its worst slump in four years. Since the start of 2022, the currency has depreciated by more than 7% against the U.S. dollar, weakening past a historic low of 80 to a dollar mark earlier this week.

Is India alone in this?

  • The Indian currency is not alone in faring poorly against the dollar bill (greenback).
  • Even the historically strong euro and the British pound are taking a hammering and weakening by more than the rupee has.
  • The fact that other currencies too have appreciably lost value against the dollar can only offer cold comfort to India’s real economy.

What are the impacts of the depreciation?

  • Domestic manufacturers and services providers must now cope with higher dollar prices for the raw materials, equipment or other supplies.
  • They may also need to procure from overseas, in the wake of the supply disruptions caused by the pandemic and the war in Ukraine.
  • But they also face mounting import bills - the slide means they have to fork out more rupees for the same dollar price from even just a few months ago.

How will different sectors be impacted by the depreciation?

  • IT Sector - IT companies are the biggest gainers as they bill most clients in US dollars. Americas, including the US, contribute about 50-60% of revenue.
  • Their rupee earnings rise as the Indian currency falls.
  • Pharma Sector - A net gainer sector as it’s a big exporter though raw materials are substantial imports.
  • In FY22, India exported $24.62 b worth of products, of which about 30% is to the US. Raw material imports were about $4-5 billion.
  • Garments Sector to benefit given the significant exports and most input costs are locally sourced.
  • Oil & Gas Sector - The most adversely impacted sector as India imports over 85% of oil and half of the gas it consumes.
  • Renewable energy - Indian solar plants depend heavily on imported solar cells and modules. So, project costs would rise.
  • Steel - India exports 10-15% of its steel. The depreciation will make Indian steel more competitive globally.
  • Balances the impact of the recent export duty on steel
  • Auto - About 10-20% of a car’s total raw materials by value are imported but firms also export vehicles. The depreciation will make cars, in general, more expensive
  • Exact impact will depend on inputs purchased and level of exports.
  • FMCG - Raw material imports account for nearly half of input cost.
  • The depreciation will make prices hike to offset higher input costs.
  • Margins may be impacted as full pass-through hasn’t happened.
  • Consumer Electronics - 40-60% of total input cost on imports; in smartphones, 70-80% of input costs on imports.
  • Re fall has been largely offset by recent drop in component costs Companies not likely to drop prices since they want to improve their margins after 2 yrs.
  • Aviation - About 60% of costs in dollar terms.  
  • The depreciation will raised cost burden when fuel prices are at record highs
  • It will impact profitability. It will make overseas tickets more expensive.
  • Telecom Services - A falling rupee makes gear imports more costly.
  • Weaker rupee could push up capex bill by 5% in FY23 Drag on profits, unless telcos increase tariffs.

What are the reasons for depreciation?

  • It has been said that the rupee may be in a ‘free fall’ scenario.
  • A ‘free fall’ is a scenario that could ultimately prove rather damaging for macro-economic stability by spurring imported inflation at a time when both fiscal and monetary authorities are battling to tame runaway inflation.
  • The following factors as the major drivers of the rupee’s depreciation,
    1. Russia-Ukraine conflict,
    2. Soaring crude oil prices, and
    3. Foreign Portfolio Investors Were Selling Off Assets and fleeing to safe haven in the wake of global monetary policy tightening.

So far, in 2022, FPIs have dumped $29.6 billion in Indian equity and debt after 3 years of net investments, with the prospect of more, sharp interest rate increases by the Federal Reserve to tame 4-decade-high U.S. inflation likely to do little to staunch the outflows.

What does the US dollar index indicate?

  • The US dollar index, a measure of the greenback’s value against a basket of six major currencies, too offers little reassurance to the rupee.
  • The index is just shy of a 20-year high hit in the month of June 2022 indicating that investors are betting strongly on dollar-backed assets.
  • To know more about the US dollar index, click here.

What does the REER of Rupee say?

  • The rupee’s real effective exchange rate (REER) provides a weighted average value in relation to a basket of currencies of its major trading partners.
  • It is also signalling that the Indian currency is still overvalued and has room to depreciate further.
  • The RBI will need to judiciously utilise every dollar in its foreign exchange reserves to ensure that a likely slowdown in exports and sticky imports do not add more undue pressure on the rupee.

Reference

  1. https://www.thehindu.com/opinion/editorial/currency-caution-the-hindu-editorial-on-the-indian-rupees-depreciation/article65671013.ece
  2. https://economictimes.indiatimes.com/markets/forex/rupee-depreciation-sectoral-impact/articleshow/92944085.cms
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