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CRISIL Young Thought Leader Competition (CYTL)-2014
Contents
Executive Summary................................................................................................................................. 1
Introduction: ........................................................................................................................................... 2
SNAPSHOT OF REASONS LEADING TO RUPEE DEPRECIATION: ............................................................... 3
IMPACTS OF RUPEE DEPRECIATION: ....................................................................................................... 4
Impacts on few sectors ........................................................................................................................... 6
References: ............................................................................................................................................. 9
ii
EXECUTIVE SUMMARY
The Indian rupee was under great stress in 2013 as overseas investors are paring their
exposure to Asias third-largest economy amid international uncertainty and mounting
worries over the domestic economy. Due to stagnant reforms, and declining foreign
investment, rupee started depreciating in the early 2013. Also the QE Tapering announcement
by the US Federal Government has led to increase the demand for dollar. As a result, the
Indian Rupee dropped to 68.85 per dollar on August 28, 2013. This report lists and analyses
impacts of the depreciation in the overall economy as well as different sectors.
There are positive impacts like boost export industries like IT, handicrafts, and
pharmaceuticals textiles. There are negative impacts like increase in import bill, inflation,
burden for government and industrial foreign borrowings hurting import based industries. .
According to the Economic times, the 8% depreciation of rupee against the dollar in the past
one month shall result in a 20-25% rise in prices of imported goods. Rise in prices of all
imported goods and imported raw materials will adversely impact corporate profits. India
being an import based economy is heavily dependent on imports for energy needs and rupee
depreciation is inflating this import bill. Overall considering all the impacts depreciation of
rupee is hurts the economy though it has some positive impacts to balance. Institutions and
individuals who borrowed foreign currency loans, the value of their repayment and interest
payments is rising. For households, foreign travel and foreign education has become more
expensive. The rupees weakness also took its toll on the stock markets as benchmark indices
tumbled to their lowest close. According to livemint.com, a falling rupee also makes oil
imports costlier despite the international benchmark Brent crude remaining stable for some
time.
All in all, a weaker rupee will reignite inflation, stress corporate balance sheets and increase
the budgets subsidy bill. In addition a volatile rupee hurts economy more because investors
fear investing and economic agents are uncertain about planning their economic activities
INTRODUCTION
Depreciation refers to a fall in the value of the domestic currency with respect to
other currencies. Depreciation is caused by the demand for foreign currency exceeding its
supply in the market. In such a situation one has to pay more than before to get units of
foreign currency. This fall takes place in the market and on its own. Market determined
exchange rate serves the purpose of aligning the domestic economy with the world economy
was the price route.
India being a developing economy with high inflation, depreciation of the currency is
quite natural. A depreciation that we have seen in the last few months has hurt the economy.
Right from the beginning of year 2013, the value of rupee has been depreciating at a pace and
it hit the bottom in August. The rupee depreciation particularly hits the industrial sector and
put higher pressure on their costs as items like oil, imported coal, metals and minerals,
imported industrial intermediate products are all affected.
Although the prices of the most of the imported commodities have fallen, the
depreciating rupee has meant that the importer gets no respite as they need to pay more to
purchase the same quantity of raw materials. While depreciation means a reduction in value,
it can be advantageous as it makes exports in the depreciated currency less expensive.
The S&P BSE Sensex started plunging every day coupled with the free fall of rupee,
and there was little any one can do. The volatility in the stock market, the continued decline
of the rupee, and rising yields in government bonds reveal investors lack of faith that the
Indian government is in control of the situation due to which investment cycle is in its bottom
stage which further put pressure on Indian currency.
(monthly average)
70.00
65.00
55.00
50.00
45.00
40.00
35.00
August, 2013
April, 2013
August
December
December
April, 2012
August
December
April, 2011
August
April, 2010
August
December
April, 2009
August
December
December
April, 2008
August
December
April, 2007
August
April, 2006
August
December
30.00
April, 2005
Rupee / US $
60.00
53.5
February
54
March
54
April
55
May
59
June
60
July
64
August
68.8
September
61.2
October
November
62
61.6
d) Foreign currency non-resident (FCNR) deposits become less attractive for banks since the
swap cost of funds soars due to a higher forward premium of the dollar.
e) NRIs tend to avoid non-resident external (NRE) repatriable rupee deposits since repatriable
yield in dollar terms diminishes
Capital Account deficit Lower FII Investments and Lower FDI
The rupees weakness may make foreign investors think twice before investing. Foreign
capital inflows are typically at risk when the local currency weakens. Portfolio flows into
both debt and equity will taper, with investors subscribing to the view that the local currency
could depreciate further. This shoots up the Capital Account Deficits.
Higher burden of Debt for Companies and Government:
The interest burden would increase on foreign currency denominated debt. For companies
that have availed of foreign currency loans for implementation of projects, the rupee
depreciation will stretch their balance sheets, as the amount of debt will increase in rupee
terms. As these loans mature, the cash flows will also be impacted. According to government
statistics, out of Indias $376 billion outstanding external debt, about 23% or $85.3 billion
comprises external commercial borrowings, or ECBs. Similar behavior can be observed in
case of Government for repaying and servicing foreign debt.
Slowdown of growth and Unemployment
Falling rupee is a recipe for slowdown in economic growth. If the fall of rupee continues, the
foreign investment will dry in India thereby creating a gap between investment required for
growth and the actual investment made. Although this does not impact immediately, over the
period, unemployment rises in the economy.
as goods exported abroad will fetch dollars which in return will translate into more rupees.
Also, a weak rupee will make Indian produce more competitive in global markets which will
be fruitful for India's exports.
Overseas Indians:
Money saved is money earned. Depreciation of rupee is certainly a good news for the
overseas Indians. Those working abroad can gain more on remitting money to their
homeland.
Other Positive Impacts:
Mutual fund investors who put money into those Indian funds, which in turn invest in US
equity schemes, stand to gain as much as 37% returns from the weak rupee. Three such
feeder funds available in India are FT India Feeder Franklin India Opportunities Fund,
ICICI Prudential Blue-Chip Equity Fund and DSP Black Rock US Flexible Equity Fund.
Export industries like Software and Handicraft received windfall gains as their major market
is abroad. People living in India with kin abroad stand to gain as remittances from abroad
reap higher value with the rupees free-fall.0%.
It will be positive for the IT industry in the short-term, as the foreign investments in the
industry will increase and making them more cost-competitive. In the long run depreciation
in currency fuels inflation, affects market sentiments and it will affect signing of new
contracts by domestic IT firms
Companies face more problem when they bid for next project, they find it hard to predict
what the currency rate is going to be. At this time they will be confused whether shall I do it
at Rs. 60, Rs. 65 or Rs. 70 to the US dollar. So, the problem is if I don't see stability, on what
basis do I price? What do I tell my customer, what is the rate? Adding to this the rupee has
been declining nearly every year, like it has declined nearly 25 per cent from Rs. 54.28
against dollar on April 1, 2013, to Rs. 68.85.
This has been a real problem as companies don't know where to hedge, and even customers
don't know where to hedge. If we see three months down the line, the decline in rupee will
translate into some gains in terms of top line of the companies. However, as most companies
have a hedging policy the positive impact will be slight.
Tourism
The fall of the Indian rupee in comparison to the US dollar has adversely affected the tourist
outflow to foreign countries, especially Europe, America and South Asian countries. With
cheap air fare rates and lucrative tour packages, there was a big surge in the number
of tourists visiting abroad earlier. But now with the rupee depreciating steeply against the
dollar, as low as Rs 68 the scenario has changed almost overnight.
People have started to look for shorter trips and destinations within India. Various Indian
destinations, which are the favorites of foreigners like Kashmir, Ladakh, Darjeeling,
Andamans, Kerala, Goa, and Rajasthan, have reemerged as top draws for tourists.
The rupee depreciation has its positive side too. The inflow of foreign tourists increases as
India will become a much cheaper destination for tourists originating from the US and
Europe. So rupee depreciation has both positive and negative impacts.
Pharmaceutical Sector
The size of the Indian pharmaceutical industry is $20 billion with exports accounting for $9
billion. Indian pharma companies are likely to benefit from rupee depreciation. However, we
analyze various factors associated with the rupee vulnerability and its impact on the
companies.
Key Factors:
Level of raw material / capital goods input
Level of exports
Level of foreign currency debt
If exports >= import + debt payment = positive/ no impact
If exports < import + debt repayment = negative
Level of raw material/ capital goods input:
7
Level of exports: Export oriented companies may witness a higher value turnover. Rupees
decline increases price competitiveness of Indian products in overseas markets, which may
aid the volume led growth
Ex: Sun Pharma, Divis Labs, Dr Reddys Labs, Glenmark, Lupin
Level of foreign currency debt:
Companies which have un-hedged borrowings may face the heat. Also, ones which have high
US$ denominated loans may find it expensive to service their loan commitments
Ex:Ranbaxy, Aurobindo, Glenmark
Other Factors:
While domestic business oriented companies may remain largely unperturbed by the
declining rupee, yet they too may find the inflationary impact in their business. Also,
companies using domestic input and exporting most of output will gain the most from rupee
depreciation. If rupee sustains at current level, the loans to be repaid in FY2014E would cost
higher. Aurobindo, Glenmark and Dishman who intend to reduce their loan books this year
are likely to get impacted the most.
REFERENCES
1. RBI Database http://www.rbi.org.in/
2. Rupee Depreciation and Impact on the Economy by Dr. Nikhil Saket, Senior
Assistant Secretary, ICAI, New Delhi
http://www.indiastat.com/article/59/nikhil/full%20text.pdf
3. Zee news
http://zeenews.india.com/business/news/economy/depreciation-of-rupee-a-matter-ofconcern-pm_82909.html
http://zeenews.india.com/business/news/finance/rupees-free-fall-how-it-will-impactyou_82322.html
4. Economic times
http://articles.economictimes.indiatimes.com/2013-08-22/news/41437037_1_rupeecurrent-account-deficit-big-trade-deficit
5. The Hindu
http://www.thehindu.com/opinion/interview/rupee-depreciation-is-more-than-whatwe-can-pass-on/article5079796.ece
6. Madhyam Briefing Paper, #11, September 2013
http://www.madhyam.org.in/admin/tender/BP%20on%20Rupee.pdf
7. http://fingfx.thomsonreuters.com/2013/06/10/073227afd9.htm
8. http://www.mynewsstudio.com/index.php