Rupee Decline

-
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..

Comments

Post a Comment

Popular posts from this blog

Fixed or Floating rate for my home loan?

-
Image
With interest rates falling further and holding period for capital gains reduced from 3 to 2 years in the budget, new buyers and upgraders are looking to get the best realty deals. However, not all is done upon locating the property to buy. Choosing a right home loan product is vital to ensure that your hard earned money does not pay for exorbitant interest costs. Home Loan - Product A home loan comes with a variety of options and bargains but borrowers are not usually presented with all the available choices to make an informed choice. They are usually sold a product which may not suit them best. Let us take a case of a new buyer (or) an upgrader who seeks a loan of Rs.30 Lacs. This buyer is typically coerced into a 30-year "Fixed interest rate home loan" based on the lowest EMI option of Rs.23k per month. As this amount is close to the rental outgo of the buyer, s/he readily tends to accept the product. A "Fixed" interest rate is in favor of the borrower if
Read more

Index

-
1. Covid Impact Covid Impact, Part III - To Economy & Trade Covid Impact, Part II - To Jobs & Income Covid Impact, Part I - To your Personal Finance What's in the 1.7 crore Coronavirus Relief Package? 2 . Markets Mayhem Who’s winning when Nifty is @12k? What's behind Nifty's new peak @11470? The Curious Case of Nifty @10452 Demonetization - Impact on investments & returns! FIIs, DIIs and RIs - Part II FIIs, DIIs and RIs - Part I Are Indian Investors smarter? 3. Policy Affairs Budget 2020 Budget(s) 2019 Is this India’s sub-prime moment? Is it a war on currency or oil, again? Budget 2018 – Impact The Big Bank Scam? Startup Funding or Social Welfare?! Did Demonetization really go after black money? The Story behind Farm Subsidies Does India need a Sovereign Wealth Fund? (Part II) Does India need a Sovereign Wealth Fund? (Part I) India's Income Pyramid Rupee Decline – Reasons.. Rupee Decline 4. Mutual Fun
Read more

Covid Impact, Part I - To Personal Finance

-
The rapid spread of the novel coronavirus (aka Covid-19) across 104 countries in the world has caused panic and fear in the lives of people like never before. Stock markets across the world have fallen by 30% within a very short span of 3 weeks. Combined with the fight for market share of oil, launched by Saudi against OPEC+, it is not too clear how much more the markets will fall from this point onwards. On the one hand, while people are deeply distressed about the health & safety of their families, they are equally concerned about their job, investments and what the future beholds for them. Several questions arise in the minds of people - although we cannot address the health aspects, we shall try to address some of the key financial health issues here. Questions from an investor - What should I do? Qn1: Should I sell my stocks? Markets have fallen by 30-35% already, primarily due to the exit of large institutional investors. If your invest
Read more