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Impact of Depreciation of Rupee, India.BY: sonu | Category: Business and Finance | Post Date: 2008-09-25
Impact Of Depreciation OF Rupee In Critical Areas 1. Depreciation Impact On Pharma With a rupee that had depreciated by almost seven per cent from around Rs 43.59/60 to Rs 46.52/53 on 11th August 2006 and with over $1.5 billion in FCCB/ECBs, the Indian pharma companies faced a challenge. The falling rupee imposed a higher burden on interest charges and repayment obligations. Among those companies perceived as likely to be impacted negatively on account of rupee depreciation are Ranbaxy, Sun Pharma, Cadilla, Wockhardt, GSK India, Matrix Labs, Lupin, Jubilant and Aurobindo. However, some analysts are of the view that with the exception of Matrix Labs, the risk for most of the aforementioned companies was more notional than real. Some Analysts also said in the instance of Matrix Labs the risk is more real given its huge dollar loan. Example: Take, for instance, the Ranbaxy FCCB of $440 million, which had a conversion price of Rs 710 against market price of Rs 394.05. "In the case of Ranbaxy, it had already then utilized more than half the $440 million for its certain acquisitions .Sun Pharma has an FCCB issue of $350 million. On the rupee scenario, DSP Merrill Lynch in a recent note had forecasted that the rupee should depreciate this quarter to levels slightly beyond its recent high of Rs 47/$. 2. Oil Industry The depreciation of the Rupee could further magnify the value of oil imports, as oil firms will now have to buy dollars at a much expensive rate. This in turn is likely to negatively impact the already widening trade deficit. 3. IT Industry: In 2006 when the Rupee value was depreciating Infotech companies were making the most of a depreciating rupee and have systems in place to hedge the risk inherent in forex earnings. With over 90 per cent of the revenues of Indian IT companies coming from clients abroad, the rupee's downward trend over the past few quarters is boosting the power-packed results of the sector. The June quarter results were a case in point and were in line with the good quarters witnessed so far. The results had been as per expectations of market watchers and IT majors including Infosys, Wipro, TCS and Satyam had posted a q-o-q top line growth in the range of 2.5 to15 per cent and a bottom line growth of 2.8-24 per cent during the quarter. 4. Exports of India: Indian Express Newspapers (Bombay) Ltd MUMBAI, August 25 1998: The rupee depreciation seemed to have miserably failed in boosting the sagging exports of the country. Even though the rupee had depreciated by nearly 20 per cent in the last one year, exports had actually fallen in the period thereby demolishing the arguments of exporters and experts that a steep fall in the value of the rupee will boost performance. While the rupee fell from 35.70 to the 42.50 level, exports fell by 7.94 per cent in the first quarter (April-June) of the current year 1998. ``Exporters were demanding even devaluation of the rupee to push up exports. They were not happy with the daily depreciation of the rupee in the last one year. Exports were showing a negative growth for the first time in several years as per reports of Reserve Bank of India. 5. Manufacturing Industry: This depreciation of the rupee had a huge impact on the domestic economy as also the manufacturing and other industries. Due to this unprecedented depreciation of rupee, the country has had a very high interest rate regime and also high inflation impacting the common man severely. In spite of this the Indian manufacturing industry has really put its house in order and managed rather well the shocks of high interest rates, the depreciating rupee and also the high cost of energy. 6. Hotels : Hotels benefit from rupee depreciation as over 60% of revenues in the luxury hotel segment are in foreign currencies. Thus any depreciation of the rupee goes directly to the bottom line (FOREX income is also fully tax exempt), as none of the costs are directly linked to the exchange rate. 7. Fertilizers: Indian Express January 1998: The rupee fall has hit diammonium phosphate (DAP) fertiliser imports. As against imports of 14 lakh tonnes of DAP in kharif in 1997., negligible imports fructified in the current rabi. Industry sources said DAP imports have slowed down tremendously due to the depreciating rupee which could lead to a shortage of the fertiliser in the coming kharif season. This is despite the fact that international prices had slumped due to a glut in the global market. DAP prices dropped from $250 per tonne to $235 in December 1997. Conclusion The precipitous fall in the value of the currencies of the Southeast Asian economies, Russia and Brazil amongst others have rendered the rupee overvalued in real terms. This has adversely affected the Indian economy and this is reflected. The depreciation of a currency has several repercussions, which could have mixed effects on the economy. Article Source: http://www.saching.com About Author / Additional Info: The popular 'inverted J' curve leads us to believe that although initially the costs of such a depreciation may outweigh the benefits, in the long run the country tends to be much better off. My partner is very particular about the validity of financial details that we present in our articles and I am happy to state that he has made an honest effort to reconfirm all the financial details for all the readers of our article. 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