VR Logo

Rupee on a Free Fall

The European crisis is the primary cause for the rupee weakness, which has impacted the entire Indian economy…

The rupee weakness is largely due to the European crisis but its impact is across the entire economy. India imports around 80 per cent of its crude oil requirement and the government will have to pay more for it in rupee terms. A higher import bill pushes the fiscal deficit, which in return pushed up inflation. Unlike some other economic factors, the RBI does not intervene extensively to control a falling rupee.

The RBI has so far, responded to the sliding rupee with no more than a symbolic intervention, because it really cannot afford to do anything more than that, given the country's foreign exchange reserves of $306 billion. This reserve, may not be enough to defend the rupee, especially when the intervention comes as a reaction to global factors. Moreover, the RBI has also to worry over the widening current account deficit, while formulating the strategy for any intervention to curtail a falling rupee.

But a fall in rupee has its share of beneficiaries. FIIs and NRIs find the Indian markets attractive, which is indicated by an incremental money flow from both the entities. In the case of NRIs, there has been a significant rise in deposits, because every dollar, pound or dirham sent to India gets more bang for the buck. NRIs are taking advantage of the fall which is further aided by high interest rates which are unlikely to abate any time soon.

In the past certain sectors of corporate India gained from a falling rupee, especially the IT sector and gems and jewellery which generates significant revenues from overseas markets. The technology companies gained because of their actual realisation of revenues in dollar terms with every one per cent change in rupee-dollar resulting in a 40 basis points impact on the margins on the net profit numbers of IT services companies like TCS and Infosys. The fluctuating rupee has only resulted in anxiety amongst importers who are fast taking recourse by using currency trading desks to hedge their risks.

Crude dollar
The fall in crude price is no more welcome for it completely negates any gains because of the fall in the rupee. Take for instance, when crude was at $120, the rupee was at 45 levels. However, now when crude is at $90; the rupee is at 57 levels. So, whatever gains one has from a fall in crude prices is neutralised by the fall in rupee, which makes us weaker because we largely depend on oil imports. The only good thing about rupee at 57 is that India becomes cheaper from the FII investment point of view, which is a reason for a spurt in FII money coming in even when the Sensex is around 17000. With Eurozone issues more or less settled; foreign investors can look back at India which looks far more attractive with its depreciating rupee.