Indian Rupee breached the Rs 55 per dollar mark and closed at 56 on 30th May, 2012 - its weakest since May 14, 2009. Most forex dealers In Mumbai during the week predicted that in the absence of any positive news, the rupee could soon touch the 60 mark against the dollar. From an investors’ perspective, the movement of rupee may not matter much as only a few can f igure out that unlike Sensex, the rupee going up is not positive news, but on the contrary, it actually means rupee is becoming weaker. Many wrongly think that if rupee goes up it is something good for them not realising when the Indian currency depreciates ag ainst any foreign cur rency it has many negative impacts from the economic point of view. Due to Risk Aversion on the part of Currency Investor s, the Demand for the US Dollar has gone up wor ld over. Uncertain Economic Situation around the globe is another reason. FII’s The Rupee is Under Attack  turning Net-Sellers and withdrawing funds from the Indian Market. The concept of Risk Aversion is the same irrespective of what timeframe you are talking about. But, the cur rent situation is much more riskier & pronounced than what was in 2007-08. Back then, the problem was localized to debt problems (loans & mortgages) in USA and had only a ripple effect across the globe. Right now, the problem is more profound and markets world-over are in a crisis and some countries are on the verge of Default. So, people are much more risk averse than what they were in 2008 and hence the situation is much worse than during the mortgage economic crisis.

The RBI has maintained strong for eign exchange reserves, to the tune of US $ 350 billion as at March-end (with foreign currency assets accounting for about 90% of these reserves). However, it has refrained     from (and has neither indicated in nearfuture) direct intervention in the f orex market to cur tail the depreciation of the rupee until now. Assuming that global uncertainty continues to prevail, exports growth is maintained and capital outf lows persist, it is expected that this depreciation would continue. A worsening in any of the above variable would ag gravate rupee depreciation. Historically, the Indian Rupee has been depreciating roughly in line with the fall in its Purchasing Power Parity (PPP) since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was Rs 9.30 per US Dollar. It is the infla tion that negatively impacts PPP and pushes a currency down. But the present spike was rather sharp on the back of debt default concern in the euro zone and after the downgrading of two largest French banks, besides Lloyds Insurance withdrawing its deposits from European banks have led to euro losing its value against dollar. As large banks, investors and financial institutions started selling euro and bought dollar, the latter appreciated against all major cur rencies including rupee.

The main driver of rupee depr eciation in the last three months has been the withdrawal of funds by foreign institutional investors (FIIs) from domestic economy. The rather pessimistic view of FIIs is being governed by global developments. The ongoing Euro-zone debt crisis seems to be intensifying and rescue packages have been of limited assistance in truly resolving the crisis. While the risk of sovereign default by individual Euro states is a concern, the risk of an impending contagion is also significant. The scenario in the US does not provide an upbeat picture either. Delays in policy formulation on the setting of debt ceiling for the state have reflected some lacunae in management of government finances. The real estate problem, weakening local government finances, lack of transparency in operations and systems of the government and deterioration the assets of the banking system observed in the Chinese economy are further drags to the global macroeconomic outlook for the coming months. Domestic macro-economic prospects as well are weighed by high inflation and sagging industrial production, which have led to downward revision of growth estimates to just 7.6% for FY12.  Consequently, FIIs have withdrawn funds from emerging markets and invested back in the dollar which has been strengthening.

When a currency loses its v alue it creates many problems for the economy. It leads to high infla tion, as India imports around 70 per cent of its crude oil requirement and the government will have to pay more f or it in rupee terms. Due to the control on oil prices, the government may not easily pass the increased prices to the consumers. Further, this higher import bill will lead to rise in fiscal deficit for the government and will push the inf lation, which is already hovering around the double-digit mark. Individually, traveling abroad becomes more expensive as travel cost can go up by at least 10 per cent. Students studying abroad too will be hit as more rupee will go out to pay for the courses and stay. Depreciation of rupee also affects the money flow in the Indian stock markets. FIIs, the main investors in the Indian equity markets, also start withdrawing their investments from the markets f earing loss of value. In terms of portfolios, if you hold stocks in oil and gas, infrastructure, fer tiliser or tyre business, your returns will take a hit as the shares of these companies will fall when the rupee falls as they procure their raw materials from abroad. On the other hand stocks of Information Technolog y (IT) companies and export-oriented units should do better.

A falling rupee will make oil imports costlier, again increasing pressure on oil retailers to hike prices of at least de-regulated fuel like petrol. Depreciation of the local currency naturally manif ests in higher import costs for the domestic economy. Assuming that both imports and exports maintain their cur rent growth rates through the year, higher import costs would widen the trade and current account deficit of the country. Commodities prices that are internationally denominated in US dollars would naturally be priced higher on the back of a stronger Dollar. The fiscal deficit for FY12 was budgeted at 4.6% of GDP in Febr uary, with the price of oil pegged at US $ 100 per barrel. Throughout FY12 so far, however, the price of oil has been well above this reference rate, hovering at an average of US $ 110 over the last three months. Oil subsidy for the year is about Rs 24,000 crore for FY12. This will rise on account of the higher cost of oil being borne by the government. While there have been moves to link some prices of oil-products to the market, there would still tend to be an increase in subsidy on LPG, diesel, kerosene. The government has already enhanced its borrowing programme in H2 FY12 by Rs 52,000 crore, to bridge the f iscal gap. Higher rates will come in the way of potential borrowers in the ECB market. Today given the interest rate differentials in domestic and global markets, there is an advantage in using the ECB route. With the depr eciating rupee, this will make it less attractive. Further, those who have to service their loans will have to bear the higher cost of debt ser vice. Usually exports g et a boost in case the domestic currency depreciates because exports become cheaper in international markets. However, given sluggish global conditions, only some sectors would tend to gain where our competitiveness will increase such as textiles, leather goods, processed food products and gems and jewellery. In case, imported raw material is used in these industries they would be adversely affected. Therefore, exports may not be able to leverage fully.

However, When a currency depreciates, the exporters rejoice because they get more of the local currency for every unit of foreign cur rency though the quantum of trade remains unchanged. But this time, many exporter s were caught of f guard. For one, there is little dollar supply in the market as most exporters seem to have covered themselves in the Rs 45- 46 range. “Sudden changes in the position of the rupee do not really matter much. The depr eciating rupee will be positive f or the Indian IT sector who generate more than 80-90 per cent of their $70 billion revenue from the overseas markets and this kind of appreciation in foreign currency will enhance their actual realisation of revenue in dollar terms. Every one per cent change in rupee-dollar has a 40 basis points impact on the margins on the net profit numbers of IT services companies like TCS, Infosys, HCL to mention a few. However, IDBI Bank chairman R M Malla was of the viewed that “exporter s gain only in the shortter m and after that overseas buyers seek price adjustment.” Individually, expatriates living outside India too g ain by rupee depr eciation. In f act, the expat Indians understand the currency movement lot better than the resident Indians.

Bearish sentiments took a strong grip on domestic equity markets which led to foreign investors selling their interests, again leading to increased demand for the dollar. The Indian rupee has lost 20 per cent in the past four months itself. Analysts expect pressure to continue on the rupee at least in the short term because of the country’s large current account deficit, which has tripled to $15 billion in the April-June quarter of current fiscal, when compared to the previous quarter. The difference between a country’s imports of goods, ser vices and its exports is called current account deficit. For the whole of 2012-13, cur rent account deficit is expected to be around $70 billion.

Md. Israr