Depreciation in Rupee: How will it impact the Indian companies

Posted By: Religare
Subscribe to GoodReturns

Depreciation in Rupee: Impact on the Indian companies
64.904United States Dollar
The depreciation in Indian rupee against the dollar may trigger alarm bells for the Indian economy which is heavily dependent on energy imports and whose exports have yet not touched the levels of the likes of China.

India's exports during the month of November stood at USD 22.32164 billion against imports of USD 35.92243 billion. In such a scenario depreciation in the value of the rupee against the dollar widens India's current account deficit which in December stood at above 3.6 per cent of GDP.

Depreciation in the value of a currency benefits exporters and hurts importers. It makes India's exports cheaper and more competitive. On the other hand imports of everything -from oil to capital goods - become dearer because of the decline in the value of rupee.

Depreciation in the value of a currency has adverse psychological effects on the participants of the economy. The first sign of the 1991 balance-of-trade crisis came with the depreciation in the value of rupee. In 2011, the rupee depreciated by more than 18 per cent against the dollar, making it the second worst currency performer in the world after the Argentinean Peso.

The currencies of other emerging markets also depreciated in 2011 as investors dumped their currencies and rushed to the currencies of developed economies like US and Japan in the uncertain global economic environment caused by the headwinds from Euro zone.

Indian companies will find it more expensive to service their external commercial borrowing liabilities (ECBs) because of the depreciation in the value of rupee against the dollar. India's external commercial borrowings at the end of the September quarter stood at USD 326.6 billion. Indian companies' share of this debt is 75.7 per cent while the remaining 24.3 per cent is held by the Indian government. Dollar debt constituted 55.8 per cent of the total external commercial borrowings at the end of the September quarter.

The effect of depreciation in rupee is not only limited to companies and industries that have dollar dealings. In emerging market currencies like the Indian rupee there is little cross trading. So if an Indian company has to pay in Brazilian Real then it will have to first buy dollars and then it will use those dollars to buy the Brazilian Real. So because of the increase in price of dollar, the Real liabilities of the Indian company will also become dearer.

Import oriented industries like oil refineries are finding their profit margins depressed because of the currency depreciation as the cost of their raw material - crude oil - has increased in rupees. Oil refining companies like BPCL and marketing companies like Indian Oil are finding it hard to pass all of this increase to the customers. Their losses are increasing due to the decline in the value of rupee.

Similarly capital expenditure plans of Indian companies have received a setback as imports of capital goods have become costlier because of the adverse movement in rupee. Capital goods industries rely on imports for a large component of their products and the depreciation in rupee had some role to play in the 25 per cent decline in capital goods production in the month of October.

Dion Global Solutions Ltd

Read more about: currency, dollar, euro zone, imports
Story first published: Friday, January 6, 2012, 23:31 [IST]
Please Wait while comments are loading...
Company Search
Enter the first few characters of the company's name or the NSE symbol or BSE code and click 'Go'