Friday, March 6, 2009

Depreciating rupee and its effect on India

Excellent article at Economic Times:

Is steep rupee depreciation worrisome?


Exporters will benefit in the short

term:
Biswajit Dhar,Professor, Centre for WTO Studies, IIFT*

The depreciation of the rupee during the past few days, which has seen the currency reach new depths, has come at a time when the markets are giving mixed signals. One the one hand, the trade data for January 2009 released earlier this week shows that the trade balance has narrowed for the fifth straight month, even as the decline in exports remains a cause for concern.
The negative cue comes from yet another episode of withdrawal of FIIs. While analysts would argue that the latter phenomenon represents nothing more than a cyclical pattern of FIIs’ involvement in the Indian economy , there needs to be a careful monitoring of the assessment made by the fund managers about the Indian economy in the days ahead.

At a broader level, however, the depreciation of the currency brings to the fore several issues. Purists would argue that the currency depreciation should not be a major cause for concern in the short run for it provides an opportunity to the exporters to become more price-competitive.

Such a situation would auger well for the Indian industry as it seeks to step up its exports in the global markets that are in the midst of a slump. At the same time, the weakening of the currency would provide an added dose of protection to the domestic enterprises, especially at a time when these enterprises are smarting under the growing threat of imports from some of India’s major trading partners.

It should, however, be pointed out that the currency depreciation is detrimental to the interests of India’s exporters in the service sector as their export earnings would take a hit. With the economic downturn in the United States showing no signs of abatement, this sector is already under considerable pressure, and therefore, the depreciation of the rupee comes as a double whammy.

But what should worry the policymarkers is the fact that currency depreciation would increase the cost of debt servicing. This dimension needs attention particularly since India’s external debt, which has been creeping up since 2007, has increased by more than a quarter in the first six months of the current fiscal.



It has the potential to trigger FII outflows: Yashika Singh, Dun & Bradstreet India

The rupee has depreciated by as much as 30% against the US dollar since the beginning of the current fiscal. A confluence of factors such as increase in FII outflows from the domestic equity market, a strengthening dollar, waning exports and weakening domestic economy have weighed down the value of the rupee.

Although the rupee value will remain depressed against the dollar, it is likely to stabilise around 49 against the US dollar in the near term as the heightened risk aversion of FIIs subsides and the RBI intervenes to rein in the rupee value.

The depreciating rupee is likely to add to the woes of Indian firms with significant levels of foreign currency-denominated, especially dollar-denominated loans. Increase in interest payment and principal obligations might lead to forex losses for companies with dollar loans. As per latest data, India had an external debt of $221.3 billion at the end of June 2008.

The adverse impact of the recent depreciation in the rupee is likely to be felt more so on the shortterm debt, which accounts for around 20% of India’s total external debt. A steep depreciation in the rupee has the potential to trigger FII outflows and is likely to dissuade NRI as well as FII investors from parking funds in India, as potential returns earned will be adversely affected. In fact, according to the latest available data, NRI deposits declined by as much as $1.1 billion to $42.6 billion as at end-June 2008 as compared to end-March 2008 level.

The RBI’s intervention in the forex market to support the depreciating rupee during the last few months has in part led to a decline in India’s foreign exchange reserves. India’s foreign exchange reserves have declined by $62.35 billion to $249.53 billion as on February 20, 2008 (from $311.88 billion as on April 4, 2008).

Depleting foreign exchange reserves is another cause for concern, as the available import cover is lowered, along with an adverse impact on India’s foreign debt sustainability. The depreciating rupee will do little to increase India’s exports, given similar depreciation in the currencies of India’s competitors and the global slowdown in demand.

1 comment:

Anonymous said...

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