Imports Cost More; Overseas Travel, Edu Hurt
Based on Monday's closing price, the rupee has never been cheaper
against the dollar, although it had flirted with the 52.20 mark in March 2009 following the global financial crisis. But unlike then, when the slide halted as global markets recovered, this time round, foreign exchange dealers are betting on a further fall.
There are projections of the currency falling to 55 against the greenback as economic fundamentals stay weak. If the doomsayers get it right, life isn't going to be easy. The sharp fall evoked an almost immediate response from edible oil company Adani Wilmar, which raised prices, while those selling palm and other oils that are mainly imported are expected to follow suit. White goods and phone makers are mulling a 2-10% hike.
SOME GAIN, LOTS OF PAIN
WINNERS
Families of those working overseas will get more rupees for dollars remitted by them Exporters get more rupees for the same price in dollars Tourism may get small boost as foreigners will have to pay fewer dollars for vacationing in India Companies that manufacture export substitutes will get protection through cheap imports
LOSERS
Students will have to pay higher fee and living charges in rupee terms. Medicare to also get more expensive
Overseas travel to get more expensive as you will have to shell out more rupees for the same amount of dollars
Imports to get costlier, hit oil and commodities. Adani Wilmar hikes edible oil prices
Hampers govt's efforts to use imports to tame inflation
Companies will have to pay more for repaying foreign debt. They also stand to lose if they had not hedged properly—the likely scenario since few would have foreseen the rupee hitting 52/$
Higher oil import bill could put greater strain on govt finances, given clamour for higher subsidies
WHY DID IT HAPPEN?
Investors rushing to US dollar in flight for safety. Other currencies, including rupee, have plummeted as demand for dollar has soared FIIs exiting Indian stocks to put money in US T-bills
HOW FAR WILL IT FALL?
Expected to decline to around 52.50 against dollar. Traders say it may hit 55 next year, given the weak fundamentals of the economy Hike in short-term rates may not helpAweakening rupee is also eating into the gains
of falling international commodity prices with markets staying edgy due to fresh talk of recession and the inability of US lawmakers to push through a $1.2 trillion spending cut.
Reflecting the nervousness, the BSE sensex slumped 425 points and fell below the 16,000 mark to close at 15,946. The last time the sensex closed below 16,000 was on October 5, 2011 after Moody's downgraded SBI's credit rating.
With the global economic forecast remaining bleak, foreign investors are pulling out of risky and emerging market assets and embracing safe haven options such as the dollar and US treasury bonds.
Following Monday's fall, the rupee has declined more than seven rupees against the dollar since August 1. A weaker rupee adds to inflation by pushing up cost of imports, particularly crude. Every weakening rupee adds Rs 8,000 crore to the crude bill.
The slide adds to the government's policy worries given the high inflation level, a slowing economy and rising trade deficit.
It's just not oil and other imports, you will have to shell out more Indian currency for foreign travel, overseas education and medical treatment abroad. For companies, the increase in dollar value pushes up the cost of imports and of dollar funding. Exporters who have hedged by selling dollars in the forward market will take a mark-to-market hit as their dollars will fetch less than what they have promised to sell it at.
Monday's trigger for the currency market turmoil was pessimism over a senate deal to cut the US deficit. Bankers are anticipating a shortage in dollar funding and are hoardingcash by parking them in shortterm US treasuries which are the most liquid of all investments. Compared to the 8.5% returns that banks receive in Indian markets, lenders receive almost zero interest on three-year treasuries.
Dealers say that because of the risk aversion, a hike in short-term rates—RBI's traditional tool for stabilizing the rupee—may not work.
"RBI can address this problem in the short term by opening up the capital account. But a long-term solution will require structural reforms that will lead to a positive current account and trade balance," said Ashish Vaidya, head of fixed income currency and commodities at UBS India.
He added that since most international financial institutions were shrinking their balance sheets it was unlikely that even capital account easing would bring in more dollars.
No comments:
Post a Comment