Indian rupee has been free falling against the US Dollar for a while and yesterday it touched a new all time low of 55.39 rupees against the American dollar. Whilst there have been recent reports about how the Indian economy is pegged to grow at 7.5% in 2012, depreciation in the value of rupee is not a good sign.
One of the first hits that the economy takes when rupee tumbles is the rise in cost of imports. India imports roughly 70% of its crude oil requirements and a falling rupee means that the government will have to pay more.
Although oil and petroleum prices are controlled, the end consumer may very well bear the brunt of this increase in costs.
US Dollar Vs Indian Rupee [ 1 Year Chart]
In fact, Petroleum Minister S Jaipal Reddy talked about an immediate increase in fuel prices yesterday when the rupee dipped to new lows. He said "If rupee depreciates by one against the US dollar, our oil companies lose Rs 8,000 crore (annually)"
Some Negatives of Falling Rupee
We know that higher fuel prices can spiral into increase in inflation as industries across the board take a hit. This dreadful cycle of higher costs for crude oil resulting in losses for government units and higher fuel costs for industries and the end consumer is a challenging situation for the Indian economy.
The falling rupee also hits companies which rely heavily on foreign currency outflows to keep business operations running. Take for example the airline industry. For airlines that service international routes – International airport fees, lease of airplanes, salaries of expat pilots, jet fuel prices and many more relatively fixed costs are dollar driven. Such outflows in dollar terms become costlier when realized when local currency falls.
A further hit in demand for foreign travel is taken as the common man is likely to cancel outbound overseas trips during these times. Flights, hotel stays and every other service in foreign countries becomes more expensive as the purchasing power of rupee falls.
Even domestic airlines scramble to keep fuel and airline lease costs under tab by implementing measures like avoiding flying at high altitudes, sourcing cheaper on-flight meals, hire local pilots and taxing aircrafts with one engine only.
A falling rupee is also bad for the share market as the negative trend not only portrays a grim picture from a pure number crunching approach but also weighs in on investor sentiment. Foreign Institutional Investors (FII) may suddenly go on sell mode if fear of future losses outweighs likelihood of gain.
On the upside, times like these are excellent buying opportunities. The stock market is currently trading in the vicinity of 4 month lows and blue chip stocks are bottoming out.
There could be an enormous gain potential for such stocks in the long run. Investors who have made their millions from the share markets wait month after month for opportunities like these to buy-in at lower prices and sell when markets rebound.
Some Positives of Falling Rupee
In the midst of this chaos as the rupee tumbles, industries with dollar dominated revenues may in fact benefit from the depreciation of local currency. A prime example is the Indian IT sector which relies heavily on overseas revenue.
As a majority of revenue comes from overseas markets, companies like Wipro, Infosys, TCS, etc may witness higher realization of their dollar dominated revenue. However with low global demand and weaker growth forecasts, the full potential of the upside of rupee depreciation for the IT sector is yet to be seen.
Sectors like domestic travel could witness a boost as travellers will prefer to stay away from foreign destinations where they will get a subdued bang for their buck for the time being. Even Indian expats living and working abroad benefit from rupee depreciation. If they are paid in dollars, the realization potential of their salary in rupee spikes.
The rupee has lost about 22% since the beginning of 2012 and more than 11% since February this year.
Certain analyst camps blame the downfall on global concerns while other claim domestic woes are fuelling the drop. The government and mainly the RBI will need to intervene and clamp down on the sliding rupee to add stability to already volatile markets.
The poor performance of rupee is a drag on the Indian economy however there are definitely certain upsides to a falling currency which represent gain opportunities if investment decisions are taken at the right time.