Tradeindia Exim Newsletter

Exim Newsletter,22 November, 2011

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CEO's Note

Fall of the rupee worrisome

The rupee fell to 52.15 against the US dollar on Monday. On the surface, the news looks good for exporters and bad for importers. But at this moment, the situation is not as simple as that. The abrupt dive the rupee has taken may result in many dire consequences, which will be good for none, for many reasons.

First of all, the rupee's slump has come at a bad time. The economy is reeling under high inflation, which the RBI is trying to tame down by raising interest rates, but with little success. As a result, the Indian industry has to carry the burden of high costs of borrowing and inputs.

India imports around 70 percent of its total oil requirement. With every one rupee fall against the US dollar the Indian oil industry losing Rs. 8000 crore on annual basis if the prices are not raised, the weak rupee may soon result in fuel price hike, which will in turn further increase inflationary pressure in the economy, also making it difficult for the RBI to exit from its tight monetary stance.

In addition, the rupee crash is likely to result in higher fiscal deficit, which is already at a concerning level and likely to exceed 4.6 percent of the GDP target in the current fiscal. Another concern is that if the rupee remains weak for a long period, foreign investors and creditors will lose confidence in our economy. Already there is a 23 percent fall in investment by Foreign Institutional Investors (FIIs) since May end. Now the rupee fall may further worsen the situation.

The rupee plunge may also affect our companies that have taken foreign loans. Since the beginning of this year, Indian companies have borrowed close to $29 billion in foreign currencies. If the current currency valuations persist, the cost of repaying these foreign loans will be higher by a whopping amount.

As far exporters' benefit is concerned, the rupee fall will get them more rupees for the same price in dollars but those who have hedged their exposure at lower levels will see only limited gains. Also, the high costs of raw materials and borrowing are there to mitigate their profits. Apart from these worries, the dried up global demand will also affect the exporters.

The bottom line: the rupee crash is another blow to the economy. It has hit at a vulnerable moment. If the rupee's weakness persists for a long period, the economy will certainly be closer to a bigger problem. It is responsibility of none but the government to prevent such a possibility.

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