Impact of Rupee Depreciation
The rupee has depreciated by more than 18 percent since May 2011, moreover with the rupee breaching the 53 dollar mark, profit margins of companies that import commodities or components would come under severe pressure, which could result in price increases for the consumer. The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediate products all are getting affected. Although the prices of most of the imported commodities have fallen, the depreciating rupee has meant that the importer gets no respite as they need to pay more to purchase the same quantity of raw materials. The depreciating rupee would keep the price of imported commodities elevated. Thus the industrial sector is bound to get adversely hit.
Impact of Rupee Depreciation
Primarily the consequences of weak rupee are to be felt through:
A. Increase in the Import Bill
A depreciation of the local currency results in higher import costs for the country. Failure of a similar rise being experienced in the prices of exportable commodities is going to result in a widening of current account deficit of the country.
B. Higher Inflation
Increase in import prices of essential commodities such as crude oil, fertilizer, pulses, edible oils, coal and other industrial raw materials are bound to increase the prices of the final goods. Thereby making it costlier for the consumers and hence inflation might be pushed up further.
C. Fiscal Slippage
The central government fiscal burden might increase as the hike in the prices of imported crude oil and fertilizer might warrant for a higher subsidy provision to be made for these commodities.
D. Increase in Cost of Borrowings
Interest rate differentials in domestic and global markets encourage the industry to raise money through foreign markets however a fall in the rupee value would negate the benefits of doing so.
Usual discussions on the fall in the rupee bring up macro-economic matters such as slowing economic growth, corporate earnings and market volatility. However, the woes aren’t restricted to corporate corridors or the Dalal Street. For the common man, the falling rupee is going to hit where it hurts the most-the pocket.
From essentials such as food and education to foreign vacation and the swanky gadget you plan to buy, the falling rupee will hurt you in more ways than one.
High inflation has been pinching you for more than a year now. Now, the weakening rupee has made crude oil, fertilizers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are not for your daily consumption, they impact your finances indirectly. For instance, since India depends on imports for a large part of crude oil it consumes, a weak rupee will influence petrol and diesel prices. “Fuel being directly connected with the cost of transportation, prices of goods that are transported from one part of the country to another, such as food, are bound to rise. This will have a direct impact on the household budget.
• Fast moving consumer goods (FMCG), such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive. The impact of rupee depreciation on the FMCG sector will be due to higher cost of imported raw materials. The companies were already facing cost pressures. The rupee depreciation has added to their woes. They will have to revise prices. Hindustan Uniliver and Procter & Gamble have already taken steps in this direction. Pulses and oil, which account for a large part of India’s imports, will also be affected. “Crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its price will add to the inflationary pressure.
• JOBS AND REMUNERATION
Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which is dependent on imports will have to face an increase in cost of production and operations. “In order to nullify the increase, these companies will have to rationalize costs within their control. One of this will be human resources. So, either lesser number of people will be hired or the salary bill will be kept constant or reduced. However, it is a good time for industries which earn in dollars. “The information technology sector stands to gain, but global recessionary conditions may set off the impact.
• BUYING A CAR
Depreciation of rupee has impacted the automobile sector in three ways. First, input costs have raised as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms. Third, many have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. Therefore, more or less all auto companies will have to increase prices. Maruti has already revised prices twice in last two months. Others like Hyundai, Honda and Ford that have large import content in their cars will have to soon increase prices to protect margins.
The imported paperback, your favourite pizza and the latest laptop will also become more expensive. There is an increase in the cost of imported books as well as the cost of sourcing them. In most cases we are trying to absorb the increased cost, but there may be scenarios where the end-user will get impacted. Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India are not denying the impact on profitability. “The depreciating rupee has had a significant impact on our capital expenditure as we import a lot of special kitchen equipment. There has been an indirect impact too as a small part of inputs are imported by our suppliers. If the trend continues, we will be forced to pass on some burden to customers,” says Vikram Bakshi, managing director and JV Partner, McDonald’s India (North & East).