What the rupee’s fall means

• The rupee has fallen 5.2% in the current financial year, from close to 65 on March 28 to an 18-month low of 68.42 against the dollar.
• As worries for importers, travellers and even students rise steadily, analysts are watching the currency’s steady march towards the 70-mark as international crude oil prices continue to rally and foreign funds flow out.

Analysis:

• There are three major reasons behind rupee’s fall. The rise in crude prices, portfolio outflows from India due to the selling of stocks, especially by foreign portfolio investors (FPIs), and a growing anticipation of interest rates rising in the US.
• Brent crude prices have increased from $70.30 to over $80 per barrel since the beginning of the new financial year in April. This is mainly due to concerns over supply disruptions after the rise in US tensions with Iran, which contributes 11-12% of OPEC production. As oil prices rise, India’s trade deficit — excess of imports over exports — will worsen, which can in turn impact the current account deficit.
• Expecting US interest rates to go up, FPIs have taken out Rs 27,000 crore from India in April and May so far, which is over $4 billion in less than two months. As the US Federal Reserve raises rates further — which is bound to happen — FPIs will prefer to invest in their home country as the arbitrage gain while investing in India and emerging markets will decline. A weakening rupee will also lower returns, which will in turn impact future inflows.
• Importers will be hit as the cost of getting goods or equipment into India will increase. When the rupee weakens, importers, especially oil companies and other import-intensive companies, have to shell out more rupees to buy an equivalent amount of dollars. In this sense, a weak rupee can act as a kind of import tax. For the oil sector, it is a double whammy, as the rise in crude prices and the decline in rupee value add to retail fuel prices. Margins of oil companies will come under pressure.
• On the other side, Exporters, especially software exporters, stand to benefit, as they get more rupees while converting dollar export earnings into Indian currency. This is expected to boost exports, which have been showing single-digit growth. In FY18, exports grew 9.78%, and given exports in April 2018 showed only 5.17% growth, it appears that the issues with GST implementation are yet to be overcome. The twin impact of FII outflows and worsening trade balance can hit the rupee further; to keep external metrics stable, therefore, exports of both services and merchandise need a further push.

By: Vishal