NEW DELHI: The sharp fall in rupee vis-a-vis dollar over the past couple of months will have more of negative impacts and minimal gain on export front, as per experts.
Import-dependent sectors are expected to face cost pressures, which would ultimately impact the consumers. Rupee depreciation could force the RBI to hold interest rates in its February Monetary Policy meet. Usually, depreciation of local currency makes exports more competitive, but experts say this may not be the true scenario in the present situation.
In recent years, a weaker rupee has not translated into major gains for Indian exports due to several structural and global factors, says Ajay Sahai, director general and CEO, Federation of Indian Export Organisation (FIEO). He explains: “If rupee depreciates by 2% and our competitor’s currency by 4%, we lose by 2%.
Recent depreciation should be seen in this perspective as rupee is one of the best performing currencies in Asia.” Between September 10 and January 10, rupee fell by 2.4%, while Malaysia Ringgit depreciated by 3.1% , Philippines Peso 3.8%, Singapore dollar by 4.1% and Japanese Yen by over 8%. On Monday, rupee fell 58 paise to close at a historic low of 86.62.
Many Indian exports from sectors like electronics, chemicals, petroleum, gems & jewellery and engineering goods rely on imported raw materials and components. “With a weaker rupee, the cost of imports rises, offsetting the competitive advantage of cheaper exports,” says Sahai.
As per Dr Niranjan Shastri, Associate Professor (Finance) at SBM - SVKM’s NMIMS Indore, import-dependent sectors could face major cost pressures, potentially impacting their profitability and pricing strategies. Consumers will have to bear higher costs as automobiles, consumer durables and travel and tourism could become expensive.
Kinjal Shah, senior vice-president and co-group head, corporate ratings, ICRA Limited, says with 35-50% of the airlines’ operating expenses denominated in US dollar, rupee depreciation impacts the operating profit margins of airlines.
This may force airlines to hike their ticket prices. India, which imports 80% of its crude oil needs, may see a rise in oil import bill. Therefore, any hope of fuel price cut in the near future is likely to be dashed. The fall in rupee puts the chances of rate cut in February at risk.
The depreciation pressures on rupee makes the February rate cut a close call, says Gaura Sen Gupta, chief economist, IDFC First Bank. “RBI is facing the full force of impossible trinity - fixed exchange rate, free capital movement and independent monetary policy. Monetary policy will need to either choose policy independence by embracing a faster pace of depreciation or choose currency stability by giving-up some of that independence,” she added.