RUPEE REMAINS THE 'FALLING' STAR OF THE DAY!
By Ruma Dubey
The Rupee remained the star, for the second day in a row. It hit a new low today against the US$ at Rs.58.98 and for now, it seems to have recouped a bit but one never really knows at this juncture. RBI is said to have intervened and that helped cull the one way downfall.
The overhang of the rupee remained on the equity markets as this new low of the rupee is indeed a cause for worry. The exports picture might look good but imports get uglier. The big worry playing on the markets today are companies with foreign currency debts as a falling rupee immediately pushes up the notional forex loss for the companies.
Marketmen have started to get wary with the word FCCB and it is becoming a big bad word on the street. FCCBs are essentially loans, taken from abroad where in lieu of debt, the company promises to either convert the debt into equity or agrees to repay. When the markets are up and the stock price is up, it makes sense to go for equity conversion as the conversion price or the trigger price is lower than that of the quoted price on the bourse. And if the price is lower than the conversion price, the company can repay in cash which is essentially repayment of the principal amount, which is known as redemption. Companies have two options – either repay if there is enough cash flow or else it will have to borrow more to repay. Thus more debt to repay existing debt. Or else, default on payment. FCCB debt does not come cheap – it is usually at 12-15% at current exchange rate. So one has to pay higher interest rate and there is a double whammy if the rupee depreciates, which is what ails India Inc. A report put out by IIFL some time ago stated that rupee depreciation makes FCCBs a more expensive option than domestic debt as it adds to the original cost of debt.
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, directly or indirectly does affect us, in many ways.
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 soon and that means a direct impact on inflation, which in turn means that chances of RBI reducing rates gets dimmer by the day.
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. 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. 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 do we 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….