Value of rupee decreased, pressure on Indian economy

This article was last updated on April 16, 2022

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It was probably one of the most unpredictable weeks for the rupee. The Indian currency fell past 51 per dollar on Friday for the first time in nearly 32 months. A weak trend in equity markets where foreign institutional investor participation is low. The overall command for dollars has remained high.

During the week, the rupee has lost 2.4 percent, its biggest weekly slip in eight weeks. At the inter-bank foreign exchange market, the household currency resumed lower at Rs. 51.05/06 per dollar as against last close of Rs. 50.90/91. During the day on Friday, it dropped further to Rs. 51.41 a dollar before ending at 51.34/35 a dollar.

Currency dealers say that the unrelenting dollar demand from banks and importers in view of firm dollar trend overseas and weak domestic equity markets have resulted in downgrading of the value of rupee. So far in 2011, the rupee has plunged 14 percent, thus making it the world’s third-worst drama currency after the Turkish Lira, which is down 17 per cent, and the Kenyan Shilling that has lost 15 per cent. It is the worst performing Asian currency and the worst among all G- 20 countries.

So how does a weak rupee impact you and me? For individuals, foreign travel gets luxurious to the extent of the rupee fall. Overseas education, electronic items, goods and services introduce are all expensive by 14 percent. In case of companies, borrowing costs rush forward if there is no currency cover.

In case of companies, unheeded positions on external commercial borrowings have resulted in erosion in profitability. Ranbaxy Laboratories, a large drug exporter, reported forex losses of Rs. 592 crore while Bharti Airtel, the largest cellular operator, lost Rs. 251 crore. Jet Airways, Tata Power, Shree Renuka Sugars are other companies that have reported losses due to the volatility in the forex markets. In general, it is bad news for importers and good news for exports.

For a country likeIndiathat imports 70 per cent of its fuel it would decipher into a fatter import bill for oil companies and would add to their losses. If rupee continues to skim, then oil companies may be forced to hike petrol prices again to compensate for their losses.

A weaker currency also fuels price rises and keeps foreign investors away from stock markets. This year foreign investors have bought only $677 million of Indian equities against $29 billion worth of net buying in 2010.

But a falling rupee boostsIndia’s exports making them more gung ho againstChinaspecifically helping sectors like software, garments and leather goods. However,Indiais not an export-oriented nation likeTaiwan,KoreaorChina. Exports account for about 20 percent of GDP while inChina, exports contribute 35 percent.

The central bank can intervene to arrest the slide. Analysts have criticized the hands off policy of the central bank. Rajeev Malik, senior economist at CLSA has argued that RBI is talking too much about not intervening in the currency market.

“In RBI’s case on rupee it is almost like it is a commercial to the rest of the world that looks ‘if you want to short currency come toIndia’. I don’t know of any central bank that would openly go on saying that look we will not arbitrate, at a time when globally things are so uncertain,” he said.

“The inflation gets injure a little bit but our imports would be restrained and exports would be encouraged because of the fall in the rupee,” said Rajiv Kumar, secretary general of Ficci.

The global vagueness has meant a lot of volatility in currency markets but the rupee’s fall has been dramatic. Market was abuzz with an assumption that the Reserve Bank has probably asked public sector banks to release dollar to arrest the fall in rupee, so it remains to be seen what will happen to rupee in the coming days.

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