Rupee goes below 53, more dips foreseen

Mohit sexena : THE pressure on the rupee will continue as long as the stalemate in the European debt crisis lasts and the policy paralysis continues in India, according to forex experts. That the Reserve Bank of India (RBI) does not have sufficient reserves to support the rupee will add to the woes in the coming days, say bankers.


The economic slowdown, rising fiscal deficit and the widening current account deficit will continue to dent investor confidence.


Worries that the European debt crisis could exacerbate the slowdown in India will continue to put pressure on the risk-averse foreign institutional investors (FIIs). This is resulting in dollars being drained out from emerging economies like India.


On Tuesday, the rupee fell to record low of Rs 53.52 a dollar but pared some of the losses to close at Rs 53.23, down 0.7 per cent from Monday’s close of Rs 52.84.


Jamal Mecklai, chief executive officer of Mecklai Financial Services, told Financial Chronicle that the rupee was being battered by the European crisis. “We are no longer insulated from the European crisis, and unless some solution to the debt crisis emerges there seems to be no support for the rupee. The lack of reforms and inflation will continue to make investors risk averse.” He, however, did not hazard a guess on where the rupee could go.


The currency fell to Rs 52.73 on November 22, and is down nearly 17 per cent from its peak in July. In November alone, it lost 7 per cent, the worst monthly fall in over 15 years.


The volatility of the exchange rate is a reflection of the health of the economy and the confidence, or rather the lack of it, that foreign investors have in India’s growth.


K Prabhakar, senior vice-president and research head of Anand Rathi, recently told Financial Chronicle that the situation would worsen immediately.


“RBI cannot intervene since it does not have enough money to do so. The rupee is expected to fall further to Rs 56 to Rs 58 in a few months,” Prabhakar said.


Vivek Mhatre, trading head of Union Bank of India, said, “Companies which have foreign currency convertible bonds (FCCBs) will be impacted first, particularly if the conversion is near, as the stock markets are down and they will have to settle the dues in dollars. Even exporters and software companies that have bought forward hedges will suffer, as they could not have hedged beyond Rs 49 or Rs 50 to a dollar. The volatility in the exchange rate is the reflection of the overall state of the economy.”


Partha Bhattacharyya, group treasurer with Essar Investment said, “On account of faltering domestic economic fundamentals like widening trade deficit and slowing growth, coupled with global risk aversion triggered by euro zone debt crisis, the outlook for rupee remains bearish in the short run. The weak rupee would add to the inflationary pressures in the economy. The outlook may reverse if the risk sentiment improves globally and Indian policy makers initiate measures to spur growth, which would attract foreign capital flows into India. Fundamentally, India continues to be a good investment destination."


Exporters aren’t really cheering. Sanjay Budhia, MD, Patton group and chairman of the CII national committee on exports, said, “It’s a myth that exporters gain when Indian currency falls. A falling rupee does not necessarily mean a gain for exporters. The ground reality is that as much as 90 per cent of this gain is taken away by imports or import parity rates. Extreme volatility on any side is not good for anybody.”


Ramu Deora, president of the Federation of the Indian Export Organisation, said, “About 50 per cent of exporters who had hedged their currency are at a loss as the cost of imported raw materials has gone up significantly. Exporters are not able to book raw material contracts or make long-term commitments on exports. This has resulted in lower industrial production.”


Companies across the board will be impacted as they would have an import or export or foreign currency borrowing or a forward contract.


Auto companies, already reeling under of rising commodity costs, are specially worried. “The falling rupee is hitting the bottom line the hardest as the industry is heavily dependent on imports. Manufacturers have no option but to increase car prices and most companies have already decided to do so in January,” said P Balendran, vice-president of General Motors India. General Motors plans to raise prices of its cars by up to 2 per cent. The increase for its highest selling Beat will be Rs 15,000.


Shashank Srivastava, chief general manager of marketing of Maruti, said both the falling rupee and the yen appreciation had put a huge pressure on the company’s margins. “We have to increase prices but when and by how much is what we have to decide.”


Jnaneswar Sen, senior vice president of marketing and sales of Honda Siel, said, “We hedge our exports and imports for a certain period. For a short term there is no problem. But in this case the depreciation has been going on for a longer period. This will impact our bottom line.”


The rupee tumble has a direct impact on IT hardware in India, Alok Bharadwaj, president of the Manufacturers’ Association for Information and Technology, said.


Sonata’s chief financial officer, N Venkataraman, said that companies that had kept their options open would see windfall gains. “But most companies would have taken forward at Rs 48 or Rs 49. Those that have FCCBs will find the conversion rates a matter of worry.”


Mindtree’s CFO, Rostow Ravana, said it is true that most IT companies will gain that cannot be sustained.

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