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Indian Rupee(₹) vs. US Dollar (USD $)

Impact

on

Trade, Finance & Banking

JOURNEY OF RUPEE: 2003 -- 2013
(Average Annual Currency Exchange Rate)

2003: Rs 46.60  On Dollar demand from Corporates and importers, Rupee plunged to a record low of Rs 47.
2004: Rs 45.28  High FII inflow during the election year saw Rupee appreciating 8.7% during April 2003 - March 2004 and touched a 47 month high of Rs 43.65 in April 2004.
2005: Rs 44.01  Rupee slumped largely not due to forex trading in the domestic market but trading within the foreign market. Rising trade deficit and High & volatile oil prices dragged the Rupee lower.
2006: Rs 45.17 Rupee depreciated  from Rs 44 to Rs 46.50 between January 2006 to August 2006 when the FII inflow into Indian equities was relatively at its lowest ($3.8 bn). With high capital inflows than CAD (Current Account Deficit), Rupee appreciated later.
2007: Rs 41.20 Rupee appreciated by 10% in the first half of the year due to RBI policies that contributed to good capital inflows. At Rs 40 per US Dollar in June 2007, the forex reserve stood at US$ 1 trillion.
2008: Rs 43.41 Rupee fell to its lowest since February 2003 on October 6, 2008  after a 5.8% dive in local stocks raised worries of more foreign fund outflows amid fears of a global recession.
2009: Rs 48.32 During the Lehman crisis, capital inflows plunged from a high of $ 107 billion  in 2007-08 to $ 7.8 billion in 2008-09. This led to a sharp fall in Rupee from  Rs 39 per US$ to Rs 50 per dollar. CAD too fell due to fall in oil prices  from $12 billion in July-September 2008  to $ 0.3 billion in January-March 2009.
2010: Rs 45.65 The Indian economy recovered from the global crisis  with capital inflows increasing from $ 51.8 billion  in 2009-10 to $ 57 billion  in 2010-11 due to higher capital inflow.
2011: Rs Rs 46.61 Policy paralysis, tight monetary policy, high inflation and weakening macro fundamentals slowed India's growth  with Rupee falling 22% , hitting an all-time low of Rs 54.32 per US dollar  on December, 15.
2012: Rs 53.34 Since December, 2011 when the Rupee hit an all-time low of Rs 54.30, RBI sold more than $ 15 billion in the forex market to curb the currency's depreciation.
2013 Rs 68.93:   On June 26, Rupee tumbles to a low and closes at 60.73 against USD. On 28th August, it descends to all time low of Rs 68.85 / 68.93. However, it starts its northward journey thereafter. It ended Rs 61.80 a Dollar on the last day of 2013 compared with the previous year close of Rs 61.92 a Dollar.
Out of the trailing 10 years  as of 31st December, 2013, 2013 was the 3rd worst year for the rupee vis-a-vis dollar. It depreciated 12% as against 24% in 2008 which was the worst year.

2014:   During first half of the year, the Rupee has continued its upward journey with general elections throwing possibility of a stable government at the centre. Strong foreign flow to lap up Indian stocks and bonds, RBI's proactive measures helped in stabilisation of Rupee around Rs 58.62/58.79 on 16th May. RBI is keeping a close watch and has silently soaked up dollars so that Rupee does not make an unhealthy gain so as to impact exports.

Impact of Fallen Rupee on Businesses & Loans

* It is a myth that the depreciation of the rupee necessarily results in massive gains for Indian exporters, For two reasons: one, India's top 5 exports--petroleum products, gems & jewellery, organic chemicals, vehicles and machinery-- are so much import dependent that the currency fluctuation in favor of exporters gets neutralized. In other words, exporters spend more in importing materials, which in turn erodes their profitability.
* Two, as buyers are aware of the currency fluctuation, renegotiation is becoming a trend now. The moment the rupee falls sharply against the dollar, foreign buyers try to renegotiate their earlier deals. As most exporters give in to the pressure and split the benefits, the advantages of a weak rupee disappear. The instances of such negotiations are however fewer when transactions take place through a letter of credit.
* Moreover, the Indian sellers are not in a seller's market. Buyers of Indian goods have an upper hand. If our exporters fail to match their expectations, they will move to other geographies.
* Some buyers now insist that transaction agreements be made in rupee terms so as to hedge against a further slide of the Indian currency.
* For those companies which borrow in foreign currency and mostly do their business in India, rupee depreciation means pain as interest, instalment payments are  denominated in dollars.
* While in first part of 2013, forex market has remained volatile, the offshore loan and bond markets are flush with funds and corporates find little difficulty to raise fresh loan or rollover existing ones.

*Banking, Insurance who frequently remodel existing IT infrastructure including personal computers and servers will be adversely affected by a weakening rupee. However, the organizations are resorting to Fixed Price Contracts and pay-per-use models to mitigate the risk of sharp swings in currency. Or they can go for cloud models where hardware costs are borne by the service provider or look at total outsourcing where they pay for mutually-agreed service levels and not infrastructure.

*Banking, Insurance who frequently remodel existing IT infrastructure including personal computers and servers will be adversely affected by a weakening rupee. However, the organizations are resorting to Fixed Price Contracts and pay-per-use models to mitigate the risk of sharp swings in currency. Or they can go for cloud models where hardware costs are borne by the service provider or look at total outsourcing where they pay for mutually-agreed service levels and not infrastructure.

* Software companies are likely to be benefited by a falling rupee.1% drop in currency exchange value normally leads to 30-35 basis point gain in EBITDA of such companies. India's software exports grew by 18% in FY 2011-12 and likely to grow by 10% this fiscal.

* EDIBLE OIL PRICES TO PINCH: India imports nearly 10 million tonnes of edible oil, which is about 60% of the domestic demand. As import becomes costlier, domestic cooking oil price shoots up. Leading edible oil firms such as Adani Wilmer and Ruchi Soya will be adversely affected.

* Investments made abroad shall get a boost.

* Foreign education and Outbound tour packages will be costly.

* For export oriented firms, there may be unhedged profits as most companies hedge around 60% of their foreign revenue.* The RBI allows corporates to raise funds through foreign currency loans (ECBs) from overseas markets for specific purposes such as import of capital goods or funding of projects. Under norms, corporates cannot borrow at a rate greater than 3.5-5 percentage points over dollar benchmark interest rates. Because of huge amount of quantitative easing undertaken by US Federal Reserve in the past few years, effectively injecting funds into global money markets, dollar interest rates have fallen steeply and stand now at below 1% (as of 30/6/2013).But added to the overall dollar interest costs, companies must account for the weakening of the rupee over the tenure of the loan. That could take the rate to about 8-8.5% depending on how creditworthy borrower is. That is still less than the borrowing cost in rupees. A possible curtailment of quantitative easing may severely impact the rupee/dollar exchange rate and push up rates. As per 2011-12 balance sheets, there were about 59 companies whose foreign currency loans alone were greater than a third of their net worth. ( Read-article1 ,article1word , article2)

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