Good and bad of the Indian rupee’s decline

While it is good news for exporters and expatriates, a strong dollar hurts the country's import bill

An Indian worker sits on the backside of a banana truck in Jalandhar on August 23, 2018. (Photo by SHAMMI MEHRA / AFP)
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Yash Somaiya, who runs a small chemicals manufacturing company in Mumbai, is closely watching the fluctuations in the Indian rupee.

His company imports raw materials from South Korea, priced in US dollars, so the fact that the rupee hit a record low recently and is still hovering close to that level, makes those goods more expensive for him to purchase.

“This creates a huge problem,” says Mr Somaiya, the managing partner of Innoven Chem. “We can only absorb the currency depreciation to a certain extent. After a point, price increases do get passed on, at least partially if not entirely, to customers.”

The rupee fell below the 70 mark against the US dollar for the first time this month as a result of a stronger dollar and an emerging market currency rout triggered by the Turkish lira. The rupee has fallen by about 10 per cent against the dollar since the start of the year, with higher US interest rates, rising crude oil prices and global trade war fears all boosting the greenback.

A soft rupee has significant implications for importers and exporters, remittances flowing into India, inflation and the wider economy. Given India’s large dependence on imports – in particular crude oil – some analysts say a weaker rupee reduces India’s purchasing power and widens its current account deficit.

"The decline in the rupee makes imports expensive and increases inflation," says Mohit Ralhan, the managing partner and chief investment officer at TIW Private Equity, based in New Delhi. "On the other hand, it is positive for the exports sector. But India is a net importer, so overall a weak currency is not desirable."

With general elections due next year in India, this creates some uncertainty around the political scenario, adding to risks for the rupee, Mr Ralhan says.

A decline in the rupee is good news for Indian expatriates in countries including the UAE and United States, who get more rupees for their dollars or dirhams – which is pegged to the dollar – when sending money home. India is the largest recipient of remittances globally, with Indian expatriates sending $69 billion (Dh253bn) back to their home country last year, according to the World Bank.  

But at the same time a weaker rupee drives up inflation, and with goods becoming more expensive, non-resident Indians may not find their rupees going as far in India.

A 5 per cent depreciation in the rupee can increase inflation in India by about 20 basis points, according to the Reserve Bank of India, the country's central bank.

“India being a net importing nation, a weak rupee has the potential to increase domestic inflation through an oil import bill,” says Soumen Chatterjee, the director of research at Guiness Securities.

“As crude oil pervades almost all sectors of the economy, retail inflation is likely to rise on a broad basis. A sustained rise in inflation will be detrimental to growth.”

Parimal Shah is vice president of MK Jokai Agri Plantations, India's third-largest manufacturer and exporter of Assam tea. He says the fact that the weak rupee makes oil more expensive certainly adds to the company's production costs. But he points out a weaker currency makes exports from India more competitive, which can have far-reaching benefits.

“It is imperative that India revs up her manufacturing and exports capabilities as this would not only lead to an increase in forex inflows, which is very important for any country, but also increase employment and help us become a global manufacturing hub,” says Mr Shah.

“An export-oriented foreign policy combined with a weaker rupee is an excellent combination as this would motivate multinationals to set up manufacturing plants in India, take advantage of the relatively skilled but cheap labour force, make their products in India and export them across the world,” he said.

Abhishek Bansal, the chairman of ABans Group of Companies, a financial services provider based in Mumbai, agrees. "A steady decline in the rupee is expected to be a big bonanza for export-oriented business," he says. "Indian IT and pharma firms and select auto-ancillary units, which earn a large part of their revenue in dollars, are likely to see their margins rise. However, actual benefits depend on the hedging strategies of these firms as well," he said.


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Some exporters are concerned any rewards may only be short term. "The weak rupee definitely benefited our exports, making the products more competitive in international markets," says Amit Momaya, the head of international business at Hemani Industries, which exports agrochemicals from India.

“But we need to also take into account that the currency is weakening not only in India but across the globe with major trading partners. Thus the depreciating currency environment might impact the buying capacities of these countries.”

Importers buying goods in India are certainly feeling the pain – and while some businesses are able to hedge, particularly large companies that may lock in fixed currency prices in advance, others are finding there is little they can do about it.

“We import everything – which is priced in euros. The rupee getting weaker obviously makes our imports more expensive, thereby reducing our margins considerably,” says Navin Khanna, the India director of BoConcept, a Danish luxury furniture brand. He says his company adjusts its prices annually in September, so next month the prices of its products will increase for customers. A further slide in the rupee over the coming months would once again eat into the company’s profits.

But Mr Khanna is hopeful authorities would intervene if the currency drops further.

“We can’t afford for an economy like ours to go down like the [Turkish] lira,” he says.

Indeed, there have already been efforts by the RBI to stem the decline. The central bank raised interest rates in June for the first time in four years and this was followed by another rate rise this month.

RBI figures show India's foreign exchange reserves decreased by $33 million to just over $400 billion in the week to August 17, as the central bank over the past few weeks has been selling US dollars to contain the rupee's depreciation.

“India’s massive build-up of forex reserve in the last few years offers support to attenuate any external vulnerability risk,” says Mr Chatterjee.

But he adds that “from the government’s part, any short-term policy reforms to support the rupee may not come as we are in an election cycle. Government is not likely to curb any populist spending in an election year.”

Some predict the rupee has further to fall.

“Given the dynamics in the currency market, expect the rupee to weaken further against the dollar as any immediate relief does not look feasible from current levels,” says Mr Bansal.

"A possible race towards the 72 mark looks more likely. The Indian rupee breaching the 70 mark is not because of India-specific factors, but owing to risks of a global contagion emerging on account of the weakening Turkish lira against the US dollar and the trade war that originated from US-China tensions."

Capital Economics  expects the rupee to weaken a little further from 72 against the dollar by the end of this year before falling to 75 by the end of 2019.

This is a worry for business owners such as Mr Somaiya.
“Larger corporates with sophisticated treasury desks can manage it better and even profit from fluctuations, but an SME like my company has little wiggle room,” he says.