Monday, June 17, 2013

What’s your rupee story?



Sliding the slide or resting at the hill top?
What’s your rupee story?

The touchdown began at 57, dribbled its way till 58 and then just fell short of a 59 basket!

The sudden and quick depreciation of rupee that began a few days back has jolted the markets once again. But is the scenario as bad as it is being made out to be? Phenomenons of the financial world have never had only one implicit and inherent impact. They are blessed with the coin quality of being two faced, but are also cursed with the rainy-side-up always being highlighted.
So, which area do you lie in? Black, white or the modest grey? Let us understand.

Companies
Export oriented sectors and net dollar earners like the hospitality sector are amongst the ones that are benefitting. Thus, IT sector will benefit being export dependant. However firms like TCS and Infosys haven’t taken benefit of the situation as they have passed on the benefit to consumers by lowering prices. Pharmaceuticals will remain stable because of their product characteristics.
For the import sector, the impact will be mixed. Chemical, fertilizer, paper, metal processing will suffer.FMCG companies will be marginally affected and mostly will be able to pass this affect on to the consumers. However, the diesel and petrol recovery will become difficult in the face of a falling rupee. The pain of those firms who have huge amounts of foreign debt depends upon the undertaken hedging. For E.g.  IDFC with full hedging will not be affected but most of the infrastructure firms without any on the book hedging are likely to suffer losses. Also, telecom companies like Bharti Airtel, Reliance Communications and Idea Cellular have been hit the most. The countries looking to raise funds overseas will benefit because the offshore loan and bond markets are highly liquid now.

Investors
The investors need to be choosy in the current season. IT and Pharmaceuticals are the safest bet. For the IT sector it maybe short term because the resultant increase in demand will either make them pass their rupee benefit to consumers by reducing their prices or will lose demand. Also, although the rupee is depreciating in terms of dollars, but is still very high as compared to currencies like Brazil Real, South African Rand, etc and thus, competition from those countries may start increasing.
Investors in foreign mutual funds would have gained in the current scenario after the conversion of the funds from dollar terms to Indian Rupees. However the funds that were invested by these foreign firms in Indian markets because of tax benefits will not lead to gains for investors.

Common man
The consumers shall stand on slippery ground because of increase in prices in the wake of costly imports, which will lead to rise in prices. Cars, home appliances, consumer electronics, mobile handsets are most likely to become expensive. Rupee depreciation increases the value of NRI remittances, thus encouraging them to increase such remittances.

Government
The current account deficit of the country may increase to the extent the Government absorbs the increasing prices of fuel imports. The inflation will also go up because of increasing cost of imports and rising fuel prices (because of rupee depreciation), making it difficult for RBI and Government to take a stand.

The Finance Ministry has shown confidence that the markets will improve in the weeks to come and that this was only a short term phenomenon. The Ministry believes that the main cause fuelling the depreciation was the misinterpretation of Ben Bernanke’s statement regarding quantitative easing and the resultant panic amongst the countries with current account deficit. There are signs that the markets will recover as the importers are being stingy regarding purchases, reserving the purchases to only the most immediate ones. NRI remittances have also gotten the clue and have significantly increased to gain from the fall. The Government and RBI are reducing gold imports and on the other hand are increasing dollar flow into the country through NRI bonds.

Thus, we can see that a financial phenomenon always comes with a grey area. The situation must always be carefully analysed in every respect to increase gains and mitigate risks to be able to benefit from the situation.

| Simran Ahluwalia |

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