The rupee's depreciation against the US dollar continues and on Tuesday, it breached 71.50 mark, tracking a fall across emerging market (EM) currencies. The rupee closed at 71.57 to the dollar, down 36 paise over Monday's close and analysts don't see a respite soon.
“The rupee continues to make a new record low on account of crisis in the emerging market currencies. There are talks of rupee moving towards 72-73 level, hence there is lot of speculative dollar buying in the market, which is driving the currency lower every day,” said Rushabh Maru, research analyst at Anand Rathi Shares and Stock Brokers.
The ongoing trade tensions between the US and China, who have slapped higher tariffs against each other's imports continues to weigh on EMs. Further, rising interest rates in the US have only strengthened the greenback as investors pull out money from EMs including India.
“Rising US interest rates and increasing global risk aversion towards emerging-market assets are generating capital outflows and exerting downward pressure on most Asian currencies, particularly the Indonesian rupiah and Indian rupee. Recent sell-offs in Indian and Indonesian currency markets underline their sensitivity to shifts in global sentiment, and suggest further bouts of pressure are likely as global monetary tightening progresses,” ratings agency Fitch said.
Trade tensions between the US and China have added to market jitters and pose downside risks to growth, it added.
For countries like India, which import a major portion of their crude oil requirements, rising prices also put pressure on their current account deficit.
Falling exports of crude oil from Iran in the wake of renewed US sanctions have put pressure on crude oil prices. On Monday, brent crude oil prices had topped $79 a barrel while the US light crude also rose. India imports close to 80 per cent of its crude oil requirements, so any increase in prices will hurt.
Graphics: PTI
Oil prices at current levels will raise expenditures and add to existing pressures on the fiscal position stemming from the lowering of goods and services tax (GST) rates on a range of consumer goods and a tax cut for small businesses as well as the relatively high minimum support prices set for this year, noted Joy Rankothge, analyst at Moody's Investors Service.
However, the impact from higher oil prices will be to an extent mitigated by strong growth prospects and other factors. Moody's expects India's economy to grow 7.5 per cent this year and in the next. GDP growth surged 8.2 per cent in the first quarter, its highest in two years.
“This robust growth, large foreign exchange reserves, a predominantly domestic funding base, strengthened monetary policy management, and macroprudential regulations on bank lending in foreign currency will broadly contain the credit impact of the higher oil prices and rising interest rates,” said Rankothge.
India's rupee has weakened over 10 per cent so far in 2018. Year-to-date, foreign institutional investors have pulled out near Rs 43,000 crore from India's equity and debt markets.
The depreciating rupee and a spike in crude oil prices will have an impact across sectors. India's airlines sector is already feeling the heat. Centre for Asia Pacific Aviation (CAPA) on Tuesday revised its outlook on the Indian aviation sector for the current financial year and has projected airline industry losses at $1.65 billion to $1.90 billion, up sharply from its earlier estimates of $430-460 million.
Elsewhere, fast moving consumer goods companies have seen their input costs, particularly of the raw materials linked to crude, rise, which will in turn make goods expensive. Other sectors, which are also dependent on imports, for instance, consumer durable makers, which either import finished products or components for the products made in India, have also seen their import bill go up.
It is also not a good time for companies that have raised money abroad over last few years. India's benchmark bond yields have risen to their highest in about four years. The rising yields and a strengthening dollar will raise borrowing costs for companies, and will also make fresh overseas fund raising difficult.
“A weakening rupee, coupled with rising interest rates, and forward premium could impinge on the Indian corporates’ ability to tap foreign markets to raise debt capital. The corporate liquidity is likely to tighten further, further reducing the financial flexibility,” noted Arindam Som, an analyst at India Ratings and Research.
A falling rupee will certainly bring some cheer for software services exports and the pharmaceutical companies. Many of these firms have large business in North America and a strengthening dollar will only boost their earnings.
Typically, a weak rupee should also boost exporters from other sectors. However, given that currencies of other major exporters like China and Indonesia among others too have depreciated sharply to the dollar, Indian firms haven't gained any advantage. Furthermore, exporters had also complained in the past of issues related to getting refunds under the Goods and Services Tax regime. There have also been challenges in getting working capital credit.
“Despite a significant weakening of the Indian rupee, merchandise export has remained subdued (rather contracted sequentially in the last two months). GST-led disruptions in input credit lock-up in FY18 dampened exports by micro, small and medium enterprises. Additionally, a weakening of major currencies across emerging economies has restricted exporters’ ability to capitalise on a weaker rupee,” said Som.
India's exports in July were valued at $25.77 billion, up 14.3 per cent year-on-year, but lower than the $27.70 billion exports in June, according to data from ministry of commerce and industry. The trade deficit for July was estimated at $18.02 billion.
The Reserve Bank of India has increased interest rates twice in the previous two monetary policy announcements. Beyond that, however, there have been limited interventions by the Reserve Bank of India to contain the falling rupee.
“There are talks of out-of-the-monetary-policy interest rate hike by the RBI and issuance of NRI bond issue. However, at present possibility of both the options is very low as the macroeconomic situation is much better than it was in 2013,” said Maru of Anand Rathi.
