-------------------------------------------------------------------------------- A look at the implications of a weaker rupee for the economy, for the common man as a consumer, job seeker, borrower and investor.
-------------------------------------------------------------------------------- C.N.M. Lavanya The Indian rupee has depreciated by about 20 per cent since April and breached the psychological mark of Rs 50 recently. An outflow of funds from the stock markets has been the key reason for the rupee erasing all its gains seen over the past five years. But the decline in the oil prices from the heady heights in July has reduced, to an extent, the adverse effects of rupee depreciation on our import bill. How does a depreciating rupee impact the common man as a consumer, job seeker, borrower and investor? For the consumer: Products that are directly imported, such as crude oil, fertilisers, pharmaceutical products, ores and metals, or use imported components such as Personal Computers and laptops, become more expensive following rupee depreciation. A major chunk of the components in computers, viz., processor, hard disk drive and motherboard, is imported. Products such as mouse, keyboard and monitor would also witness a discernible impact on their prices on account of rupee depreciation. As the input costs increase, inflation may rise in the economy. For the borrower: Companies or individuals who have taken foreign currency loans (for example, students with loans for studying abroad) may find their repayment obligation swelling as the rupee depreciates. Significant levels of foreign currency-denominated, especially dollar-denominated loans have resulted in forex losses for companies with dollar loans, because of increased interest payout and principal obligations occasioned by the declining rupee. For instance, if a borrower borrows $100 when the exchange rate was Rs 45 to a $, his original borrowing stands at Rs 4,500. After rupee depreciation to Rs 48 to a $, the same loan amounts to Rs 4,800. If the interest rate is 10 per cent, the additional interest turns out to be Rs 30 and an addition of 0.67 per dollar borrowed (30/45). Thus, the rupee depreciation results in an incremental outflow of $7.34 (6.67+0.67) for this borrower. In the case of loans taken via the Foreign Currency Non-Resident - Banks (FCNR (B)) route, the borrower has to make sure that the overall cost of borrowing (cost of forward forex cover coupled with interest cost) in foreign currency is lower than the rupee cost of funds. For the investor: A depreciating rupee makes imports of component, capital goods and raw materials more expensive. As inputs and other equipment that are imported get costlier, margins get reduced to that extent. Companies with a high import component and those with foreign currency borrowings may be marked down in the stock market as the rupee depreciates. On the other hand, companies that are export-driven may benefit in the form of better prices for the products and services sold. A depreciating rupee also reduces the returns that foreign investors earn from investing in Indian companies. Therefore a depreciating currency may be a trigger for FII outflows. NRI investors, who have been investing under various deposit schemes owing primarily to higher interest rates in India, may find such options less attractive on account of rupee depreciation. For the country's Balance of Payments: One of the consequences of depreciation of rupee is that exports realise less in foreign currency terms and imports become costlier. For a country such as India that imports essentials such as crude oil, natural resources and many capital goods, this results in a bigger current account deficit in the near term. However, a weaker rupee does make exports more competitive globally and higher exports may eventually help make up for the trade deficit. For IT companies: The IT sector is among the major job creators in the Indian economy and a depreciating rupee spells good news for the sector. For Information Technology companies, services are billed mainly in dollars or in other foreign currencies. Any depreciation of the rupee pegs up their realisations and bodes well for their margins. One of the reasons for the good second quarter results of Infosys Technologies and Satyam Computers was the depreciating rupee. One estimate suggests that a 1 per cent depreciation in the rupee expands an IT company's margins by 0.30-0.40 per cent. Given that a depreciating local currency has both its pros and cons for us, what's the outlook for the rupee? That is difficult to say at this juncture. While a strengthening dollar and outflows on the FII front have undermined the rupee in recent months, there are factors that favour rupee strength as well. India has received $14.6 billion in foreign direct investments during April-August 2008. Lower crude oil prices, a structurally sound economy and higher export realisations that will help the current account deficit are factors that may prevent further depreciation in the rupee. http://www.thehindubusinessline.com/iw/2008/11/02/stories/2008110251171700.htm Rich get experience. Experienced get rich. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
