FALLING RUPEE - THE PULL OF GRAVITY GETS STRONGER

By Ruma Dubey

The rupee is giving is the jitters once again. It has been going down consistently and today morning it fell by 26 paise to hit fresh four-month low at Rs.53.22/US$. And the math is always the same – when rupee falls, gold rises and we are currently witnessing exactly the same.

But why is the rupee falling so much? There are two factors now playing up the rupee. Firstly, dollar continues to remains the safest currency and it will remain so till the Eurozone stabilizes. Thus till the macro economic fundamentals around the world does not settle down, rupee will face selling against the dollar. Earlier, it was just the macro economic factors of others but now our very own fundamentals are weakening, giving FIIs more reason to scoot. The latest trade deficit figure was quite a shock; as per the Commerce Ministry, for FY12, it was at a record high of $185 billion. Imports were up 32% and especially oil imports, which rose 47% at $156 billion in FY12, which means India imports 80% of its oil needs. On the other hand, exports for March, for the first time since 2009, showed a fall. So rising imports and falling exports, naturally, the rupee has to logically only fall! The demand for dollars due to rising import of crude is pushing the rupee down and at the same time, demand for rupee has gone down due to slowdown in capital flows. Thus this huge mismatch between soaring demand for dollar and falling demand for rupee is pushing it to new lows.

NRIs might be celebrating the falling rupee and so will the exporters. This day-to-day new low being hit by the Indian rupee vis-à-vis the US dollar is not good news.   And it is not expected to stop here. Analysts say that in the next few months, the dollar could trade between Rs.54 to 55.

For me and you, who do not have any forex earnings as such, but if planning on a foreign holiday, well, the expenses just got further inflated. And yes, all those ‘imported’ goods– electronics, goods and other services also got more expensive. If you have children going abroad for studying, that education bill too got further inflated.  But this is not all. Whatever happens in India Inc, also directly or indirectly does affect us, in many ways.

The big concern now is on companies which have dollar denominated debt, mainly Jain Irrigation, Bharti Airtel, Shree Renuka Sugar, Jet Airways, Tata Motors, Mahindra & Mahindra, Exide, Sterlite Inds, Dish TV, Essar Oil, Arvind, Sesa Goa, Subex, JSW Steel, PFC, JSW Energy; around 70 major companies who have been consistently reporting forex losses.

A falling rupee is very bad news for IOC, HPCL and BPCL. For them, their burgeoning basket of deficit just got wider with no recourse to pass it on. For the common man, though the price of fuel was brought down, the reality is that price of fuel will only rise in the coming months. OMCs are sure to hike rates any time now.

The good news is that export oriented sectors like software, handicrafts, gems, jewellery, industrial machinery, chemicals, garments and, leather goods would be celebrating the falling rupee. It is good news also for the hotel sector as over 60% of revenues in the luxury hotel segment are in foreign currencies.

But India is not an export driven economy like China or Korea and thus the benefit is not exactly spread right across the board. The depreciating rupee means illness for pharma companies too as they too have substantial outstanding FCCBs, meaning higher interest outgo and repayment issues. Keep a watch on Ranbaxy, Sun Pharma Cadilla, Wockhardt, Matrix Labs. In the fertilizer sector, imports of Diammonium phosphate (DAP)  will get costlier, meaning either imports could go down or their costs could rise thus impacting overall agri production and costs. OMCs are undoubtedly the worst hit are HPCL, BPCL and IOC as falling rupee increases under-recoveries on domestic sale of diesel, LPG and kerosene at controlled prices. Another sector to be hit badly is the aviation sector, whose one third operations - rentals of leased aircraft, maintenance, spare parts and salary paid out to foreign crew, all this is paid in dollars. This means more rupees will go out.

One man’s pain is the other man’s gain. Such is life or else how dowe keep the balance of life intact? That’s some philosophy but reality is that currently, things look pretty precarious for India Inc. The pull of gravity is not just on the rupee….