RUPEE AT NEW LOW - BHAAG RUPEE BHAAG!
By Ruma Dubey
Why is the rupee falling?
When supply is high, more than the demand, price falls. And when demand exceeds supply, price rises. That in a nutshell, simplistically put, is the current story of rupee and US dollar. Importers need dollars to buy and thus they sell rupees to buy dollars and when imports are high, rupee supply rises and thus its price vis-à-vis the dollar falls.
But is it just supply-demand factor?
Not really. This time around, it is more than just this simplistic view. Theoretically, the rupee seems oversold and the move beyond Rs.56 has been driven largely by a flurry of negative news flow rather than exceeding demand for dollar. The fundamental story of India remains the same but the change in the equation this time is from USA, where the economy is slowly but surely bouncing back; more importantly a mood of optimism has returned. On the other hand, emerging economies are facing a run on their money as it is now a certainty that QE will be eased out gradually. So all Asian currencies are facing the pressure but India seems to be the worst hit.
Does this mean there is speculation at play?
Well, if it had been only speculation at play, then the RBI intervention would have helped. But the problem, mainly of sentiments is so deep rooted, stemming first from global risk aversion followed by not-so-good economic conditions in India. Maybe the rupee is pricing in a future shortage of dollars based on assumption that portfolio flows could get scanty.
Are FIIs on mass selling spree?
The general perception is that falling rupee and falling stock market could mean only one thing – FIIs are selling. But FIIs are not dumping stocks as being speculated. Yes, they always sell when the rupee falls as the value of their portfolio declines. As per data put out by SEBI, on 6th June’13, FIIs were net sellers at Rs.270 crore while DIIs were net buyers at Rs.298 crore. But through the month of May’13, they remained net buyers at Rs.14,465 crore while Domestic Institutional Investors (DIIs) were net sellers to the tune of Rs.12,052 crore. In fact DIIs have been net sellers every month since July’12 and the last time FIIs were net sellers was in May’12. Clearly, at least till now, FIIs buying exceeds their selling, which means they are not exactly dumping stocks as was expected. If they are selling, they are buying almost an equal amount and that is a good thing.
How can RBI help at this juncture?
There isn’t much that RBI can do at the moment as even the little that it is trying to do is not helping. Usually, when the rupee gets into a free fall, RBI will buy rupees by selling dollars. But such artificial support could be more detrimental than beneficial. RBI has not yet intervened but might if the rupee breaches Rs.58. If the question was about increasing the supply of rupee, RBI could have printed money but how can it print dollars to increase its supply?
Is the world worried about the falling rupee?
Except for Indians and NRIs and the FIIs who have invested, the rest of the world gives two hoots about the falling rupee. And that is because, the Indian rupee is not held by other Governments in their reserves while the Chinese Yuan is. Thus a falling Chinese yuan could cause world panic but not a falling rupee.
What about companies with FCCBs?
Companies have borrowed in dollars or hedged in foreign currency. So when there is under hedging there is a forex loss. And when overseas debt has to be serviced with rupee earning in a depreciating rupee environment, there are forex losses. Also not helping matters are the huge external Commercial Borrowings (ECBs). Companies like Suzlon, Tata Power, PFC, JSW Steel, SAIL, Sesa Goa, Sterlite Inds, Essar Oil, Bharti Airtel, Arvind, Bhushan Steel, Lupin, Aban Offshore, IOC, Chambal, NTPC, Usha Martin, Shree Renuka amongst many other might today be having sleepless nights.
Does falling rupee raise chances of fuel price hike?
Every time the rupee depreciates, oil companies which import crude, end up losing when sold in the domestic market. For oil marketing companies with every fall in the rupee, the under-recovery on account of petroleum products goes up by Rs 9,500 crore per year on the price-controlled items. This also means that inflation will only rise and at the moment, to expect RBI to cut rates would be too naïve.
Are IT companies the best buys now?
Not really. Yes, there will be gains. For every percentage of fall in the rupee, Infosys gains 30-40 bps in terms of profits but at the same time, one has to look at the performance of its other currencies. So cross currencies and their net effect have to be taken into account; it is not a simple gains only situation. But yes, today, in absolute terms, IT and export oriented units are big gainers while those with major import components are losers.
Will the rupee fall further?
Most forex analysts expect the rupee fall to get arrested around the same levels though at the most, if it continues to fall, it could fall to Rs.58.25 to Rs.58.50 levels but no one is yet talking about Rs.60. Deutsche Bank has put out a report and stated that it expects the rupee to appreciate in H2FY14.
Clearly, people are flocking to the dollar as a reliable currency, strengthening of the US dollar is thus also a phenomenon of the overall global scenario and not rupee alone.