Some pain, some gain in tumble

India Dispatch: Travel abroad is more costly but good time to be a non-resident Indian.

Travel abroad is more costly but good time to be a non-resident

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The rupee has lost 16 per cent this year, slumping to a record low last week.

Economists say the plunge has been caused by rising inflation, high interest rates, India's huge fiscal deficit and reduced GDP estimates as well as global market uncertainty. Some investors are also leaving emerging market equities, causing the rupee to dive further.

The rupee was a stable currency trading at about 44 to 46 per dollar on average before the slide began over a month ago.

On August 1, one rupee was worth 44.08 to the dollar.

The currency's previous all-time low of 52.18 against the dollar was on March 3, 2009.

Market makers have started calling the rupee "the worst performing currency" in the region.

The government took measures to curb the fall last week. The Reserve Bank of India (RBI) increased interest rates on foreign currency deposits by up to 100 basis points, raised the cap on external commercial borrowing by 50 basis points and took out the US$100 million (Dh367m) ceiling on net foreign currency inflows via rupee swaps, reports said.

The government tried to play down the currency's nosedive and said the fall reflected market uncertainty, urged against an "overreaction" and added it expected a self-correction.

But local press reports said the country's finance ministry had admitted the RBI has only a "limited" ability to curb the fall of the rupee.

Who takes a hit? The weaker rupee hurts companies with foreign currency debts and those that import raw materials from abroad. These firms will have to pay more rupees to pay back the money borrowed in currencies as well as spend more rupees on imports.

A weaker rupee also makes India's huge oil imports more expensive.

Imported goods will become more costly because they are paid for in dollars.

If the rupee depreciates further, it could cause trouble for India's working class, which is already suffering from high inflation.

According to the IMF, consumer prices rose 13.2 per cent last year in India.

Travel abroad also becomes more expensive as Indians will get less buck for their rupees.

Who benefits? Non-resident Indians, particularly those getting paid in dollars or dollar-pegged currencies are among the principal gainers. They now have more money available to spend or remit to their families.

A family getting a monthly remittance of $5,000 will now get 260,000 rupees at the 52 to the dollar rate instead of 225,000 rupees at the earlier 45 to the dollar rate.

Export companies and those that charge in foreign currencies will also benefit from the fall.

This is because they will earn more rupees for every dollar's worth of goods they sell. IT and the textile sector are set to gain most.

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