Indian Rupee to Touch 70

Indian Rupee to Touch 70

In a report on 21 August, 2013, Deutsche Bank said that Indian rupee could touch Rs. 70 against the US dollar in a month or so, although some revival is expected in the currency by the end of the year. The German banking major further added, “fundamentally the Indian rupee VS Dollar is undervalued and has overshot its equilibrium level substantially. Under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time. India, we fear, is entering such a zone.” Weak currency is a financial term for the currency of one country in terms of or in comparison to other important country’s currency and when it occurs, such currency loses some of its buying power.

The Indian rupee depreciated to a historical low on August 22, 2013 at Rs 65.52 (16% down so far in the current fiscal year) against US dollar and the investors pummeled stock triggering a 340 point slide in the sensex as fears appear to escalate that US Federal Reserve would start tapering its $ 85 billion a month bond buying binge that have funneled cheap money to the most distant part of the world. Around $ 14 billion has been pulled out by the overseas investors from Indian market since March this year, lowering the foreign exchange reserve to $278.67 billion on August 9 from $ 292.65 in March this year. Foreign investors have turned net sellers in August and appear to be extending their selling streak for the third consecutive months. The capital control measures like import duty hikes, restriction on gold import, buying bonds, liquidity measures, etc have not yielded desired result, rather it has scared away more short term investors from the domestic market. The experts are of opinion that, there is little respite for the rupee. This fall will continue as will the turmoil on the Bombay Stock Exchange and in the Indian bond markets. The currency crisis may fuel another bout of inflation in India by rising oil prices. India spends 60% of its import on oil– with every single value fall in rupee, a burden of Rs.9000 crores is created on the government exchequer in the form of subsidy.

Though some measures like enhanced provision for FDI may serve India well in long term, but a number of measures tend to be like haphazard decision-making for the health of Indian financial sector. The government should rethink its expenditure on expenditure program on plan spending and selling of state-owned assets. Moreover, India just does not have enough foreign exchange reserves to sell in the market so that it can intervene to support the rupee.

Reasons to Worry about the Rupee Devaluation

A currency is a standard for monetary transaction within a country. In the present globalized world, every currency tends to react to another. When one currency weakens, it is generally a sign that others might be strengthening. Weakening of one currency may be a sign of severe economic distress which may be difficult to overturn easily.

The fundamental law of economics states that if the demand for an article goes up more by its supply, its price goes up. The same thing has happened in respect of US dollar against Indian rupee. Foreign investors are withdrawing their investments in India through dollar, thus creating a shortage of dollar supply and Indian importers are requiring more dollars for paying their increasing imports bills. The fertilizer imports surged by 30% in the last two years and coal imports have doubled. For 2012-13 our gold import bill was $55 billion. Therefore, the problem of Current Account Deficit continues to persist.

If we search for the reasons for the depreciation of rupee there are series of activities that have led to the current scenario. Since the great depression of 2008, Indian economy had been continuously slowing down. Index of Industrial Production (IIP) and growth had been continually shrinking, industries were suffering loses and the unemployment was rising.

  • The high import of crude oil and gold troubled the current account deficit (CAD) further to abnormal high at 6.8% of GDP. Current Account deficit of a country occurs when a country’s total import of goods and service exceeds its export. This deficit was 4.80% in 2012 and that averaged 1.45% only from 1980 until 2012. Usually a country with strong current account surplus has an economy heavily dependent on exports revenues, with high savings ratings but weak domestic demand but these things are reverse in Indian scenario.
  •  Another reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched its three-year high level of 84.30 in May 2013, currently hovering around 81.00 and 82.00. The rupee is also feeling the pinch of the recession in the Euro zone, Euro to dollar conversion is presently at 1.335. The excessive printing of money by central banks of Euro zone and Japan has devalued their own currency values. On the other hand, the US Federal Reserve has shown signs of recovery through their stimulus, making the dollar stronger against the other currencies including the Indian rupee, at least for a short term.
  • The country with high exports enjoys a depreciating currency; the same is not applicable to India. India, rather, does not enjoy this luxury, because of its increasing outflow of dollar for oil which is a major concern to its import basket.
  • Foreign Institutional Investors (FII’s) lost faith in the Indian economy, reduced Foreign Direct Investments in India and started withdrawing money from the Indian markets. The Indian equity market has become volatile for some time now. The FII’s are in a dilemma whether to invest in India or not. A recent report as per Business Today revealed that overseas investors have pulled out a record Rs 44,162 crores (over $7.5 billion) from the Indian capital market in June 2013.
  • The Reserve Bank of India is taking every attempt to control the capital flight by restricting the ceiling of foreign investments by Indian companies and also to discourage imports by increasing short term interest rates for importers, however, the measures have not been seemed much effective so far.

GDP as a Measure for India’s Growth

Many economists never bought the “India Shinning” story based on higher GDP growth. Because, they were of opinion that GDP is not always a good measure or indicator of growth and development. GDP measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment.  Indian GDP measures growth without the effects of inflation. The single number of GDP gives you an idea of whether the economy is expanding or contracting. The Fifty to sixty percent of the Indian population has daily income around Rs 25 to Rs 50 whereas only 4% of the total population has income over Rs.100, 000 a day. GDP fails to measure this inequality. The GDP of a country doesn’t show the degree of wellness of the people or how better off people are compared to a previous period. It also fails to account correctly all the items of goods and services produced in a country together, rather depends on arbitrary conventional methods.

There is a widespread discussion in the corporate media whether India could soon confront a current account crisis similar to that in 1991 and forced to a similar bailout from the IMF.

The following table shows the position of Indian economy on different parameters:

Year

GDP Growth

Current Account Deficit (CAD) AS % of GDP

Average wholesale Price Index Inflation (%)

Investment Growth

(%)

2003-04

8.1

0

5.5

10.6

2004-05

7.0

0.4

6.5

24.0

2005-06

9.5

1.2

4.5

16.2

2006-07

9.6

1.0

6.6

13.8

2007-08

9.3

1.3

4.7

16.2

2008-09

6.7

2.3

8.1

3.5

2009-10

8.6

2.8

3.8

7.7

2010-11

9.3

2.8

9.6

14.0

2011-12

6.2

4.2

8.9

4.4

2012-13

5.0

4.8

7.6 ++

2.3*

2013-14

4.8

6.8 **

6.5 (Revised up to date estimate); Recorded 5.79 in July 2013

6.0 (Forecasted)

Table as per The Hindu Macro Fundamentals

*April – September

** Till July 2013

++April to December

Who Are Benefiting From Devaluation?

A weaker rupee is good news for software firms as most Indian software firms derive upwards of half their revenue from the US. Most of the IT companies have hedged at Rs 50-55 but now the rupee is Rs. 65 a dollar and probably will go up to Rs70.

  • The majority of the Indian pharma companies are net exporters, so they will be greatly benefited by rupee devaluation.
  • The NRIs who remit their money in Indian banks or their relatives who receives remittance in dollars will get more rupees for the same dollar amount.
  • Foreign tourist touring to India will find India a cheaper destination; local tourist industry will be benefited in this respect.

Who Are Suffering the Most from Devaluation?

Indian Finance ministry initially played down the rupee’s movement; they said in assurance it was in synchronization with other global currencies, nothing to panic although experts and currency traders were divided on the rupee’s future. Weak rupee has worsened the already-stressed trade deficit. The depreciating currency is continuously increasing the price of imported raw materials, fuel that straightaway has translated into an increase in the retail prices and at the same time deteriorating the fundamentals. And there is not much of an increase in export when global recovery is still fragile.

Importers will strongly feel the pinch of falling rupee as they will be forced to pay more rupees on importing products. Conversely, it is a delight to the exporters, because goods exported will bring more rupees when it gets converted in Indian money.

The interest burden will be more on foreign currency denominated debt. The companies who have availed of foreign currency loans, their amount of debt will be more in rupee term. Even the government of India has to repay more on their foreign debts. AS per government statistics, out of India’s $376 billion outstanding external debt, about $85.3 billion or 23% comprises external commercial borrowings.

The companies that depend of imported raw materials, a weaker rupee will have adverse impact on their profits. Foreign capital inflows will be typically at higher risk when the local currency weakens.

The weakening rupee will adversely affect the auto companies because of varying levels of imports from countries as diverse as Japan, Taiwan and Germany.

Depreciating rupee will dent the profit margin of the power sector industries that heavily depend on imported coal; running plants on imported coal may not be economically viable.

Perhaps Indian aviation industry will be the worst affected due to rupee depreciation because most of their as revenues are mostly in Indian rupee while most of their expenses are in dollars.

A weaker rupee is a real concern for every Oil Marketing Companies. This burden will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. A substantial increase in the transportation cost will fuel spiral inflation in the country.

Studying or travelling abroad will be more expensive.

Prime Minister Manmohan Singh has often argued that there is no difference between good politics and good economics. But what the government has ended up doing may hurt it both economically and politically. Indian economy and production suffered an artificial boom that reached peak in 2008 and ultimately it caused a bust and India became a victim of huge recession. The government to avoid humiliation played tricks of economic stimulus and bailout packages that never worked; rather artificial boom lead to huge crisis, mal-investment and wastage of valuable resources. The government just to help the Indian industrialists and the Indian PSUs, burdened Indian middle class and poor citizens with extreme national debt (which is alarmingly increasing) and cruel inflation.