Rupee Decline

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The Rupee has lost 27% since May 2013 (Rs.54), 14.6% since 1 Aug 2013 (Rs.60) and is @Rs.68.80 at the time of publishing this blog. Some analysts have a target of Rs.72 while others Rs.100 by the end of the year. We need to look back to see what has happened to the Incredible India that it was once. Ever since the post-liberalisation of economic reforms in 1991, India has been on a steady growth path attaining its peak growth rate of 9% GDP between 2005-2007. Few facts on the Indian currency:
  • Rupee depreciated by 37.5% from 1991 (Rs.32) to 2007 (Rs.44), i.e @2% CAGR
  • From 2007 to 2011, it was stable at around Rs.45
  • From 2011-2013 it depreciated by 53% to Rs.68.8!
How does the Rupee decline affect an Individual?
  • Loss of stocks and mutual funds portfolio (30-60% down)
  • Higher price for all consumables, leading to higher cost of living expenses
  • High inflation @10% p.a, leading to erosion of personal savings and wealth
  • Decline in domestic savings rate from a peak of 36.8% (2007) to 30% (2013)
  • Overseas education becomes expensive or unaffordable for 65,000 (US) and 55,000 (UK) Indian students abroad
How would the Rupee decline affect a Business?
  • A depreciating currency makes Indian goods competitive and its exports cheaper
  •  It positively impacts export oriented sectors such as IT & pharma
However, since most sectors in India are import dependent on oil and coal, rupee decline negatively impacts a good majority of sectors.
  • Servicing of existing $-denominated debt becomes dear
  • New debt increases so as to pay for higher cost of input materials
  • Lower demand results in lower production output
  • Profit margins becomes lower or negative
  • Cash flows becomes unpredictable, leading to uncertain business climate
How could the Rupee decline affect the Nation?
  • Declining rupee severely impacts trade balance and CAD (Current Account Deficit)
  • Widens trade deficit as oil & gold (45% of India's imports) becomes expensive
  • Narrows import cover - Forex reserves presently covers only 7 months of imports
  • Currency intervention by RBI leads to depletion of Forex reserves
  • Further departure of FII and FDI outflow could strain CAD
  • Short term debt obligations of all external debt (government and private) impacted
  • Faces possible sovereign ratings downgrade, making further borrowing difficult
  • IMF or other emergency creditors could come for rescue but may impose restrictions
  • Those policy restrictions may in turn stifle domestic businesses and favor foreign businesses
Is India alone in this currency slide? well no, we have other emerging economies to give us company, but is that a relief? certainly not. Makes one wonder how a stellar performer like India landed in a place like this once again (after 1991 crisis). Next article explores the reasons behind the rupee decline..

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