Depreciation of rupee

Depreciation of rupee

Why is rupee depreciating over the months?

A lot of the downward pressure that’s been on the Indian currency rupee in the past few months has been due to the political environment in the country, and the uncertainty caused by issues like the General Anti-Avoidance Rules (GAAR), retrospective taxation, inability to pass any policy reforms and other clouds surrounding the Indian economy.  Unlike the last time when rupee depreciated, was a time of global crisis, things aren’t as bad globally this time, and most of the trouble that’s brewing is domestic. These circumstances hardly inspire investor’s confidence and as a result money has been flowing out of Indian equities and that’s led to the downfall in the market.

What is the effect of rupee depreciation on exporters?

If you look at exporters specifically, then all other things being equal, rupee depreciation is good for them as the conversion rate is higher. But the problem is that all other things aren’t equal and they have to face a slowing market in Europe and the US.  That means that business is slowing down for them there. The recent fall of Cognizant and the drop in share prices of all IT firms subsequently is a good example of that.

What is the effect of depreciation of rupee on oil bill?

This one is the most talked about query related to fall of rupee. Since India imports most of its oil from abroad, every time oil prices shoot up, India’s oil bill shoots up and since the government subsidizes oil, the oil subsidy goes up with this.  A lesser known aspect of this is that India has actually got surplus refining capacity, and oil also happens to be India’s biggest export item. While there are price controls in the domestic market, refiners are free to sell at market rates internationally, and that’s led to big oil exports from Indian private oil players, and helps offset some of the big oil bill. In fact, oil exports might just hold the key to a trade surplus one day.

What is the effect of depreciation of rupee on companies that have borrowed in US dollar?

This could potentially become a big problem because a lot of Indian companies borrowed in foreign currency to take advantage of the low interest rates. But they didn’t sufficiently hedge to protect themselves against the adverse exchange rate movement that could take place. Now, they will have to spend a lot more rupee to buy the same level of US dollars they borrowed and not only will this nullify any interest rate savings that they may have benefited from, it will put a big dent on their resources because this is akin to a penalty on the loan.

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