RUPEE DEPRECIATION: AN INSIGHT TO THE CAUSES & UPSHOTS

Last week witnessed land slide in few regions & currency slide in few emerging economies which caused mayhem among the pilgrims & investors . Here, we would like to stick with rupee slide mainly, which has fetched itself a tag of senior citizen. A mere thoughts on the tapering of Quantitative Easing (QE) III, a massive bond buying program worth US$ 85 bn. A month by Federal Reserve (Fed), is responsible for the fall of some currencies & its further coupled by weak manufacturing data from China that stood at a 9-month low.

Background: Why the markets are fed up with Fed ? Last September, after a disappointment with US economy, Feds chairman Ben Bernanke announced the third round of QE. Hence, with more money in hands, investors started looking towards emerging economies like India, Brazil, South Africa etc. Meanwhile with the easy supply of money, yields on US Treasury bonds also dropped. Since last few months US economy has been resilient to any downtrend but its job data has shown significant improvement which reduced from the levels of 8.2% to stood at 7.6%. As a result, Mr. Bernanke announced to begin the tapering of the stimulus from the year-end onwards. Although, no specific date is mentioned but speculations are rife that it would be post September when unemployment rate would be around a comfort level of 6.5%. Repercussions The word tapering was sufficient to spook the markets be it developed or developing economies, debt or equity market as it signaled investors to pullout monies from emerging markets. Thus, investors went on selling off equities & debt instruments. The rupee logged its all-time low of 60.73 against a dollar. On the same day, Sensex shredded 526 points, nosediving by the highest single-day loss in last 2 years. It is almost 2-year single-day loss. This would lead the prices of imports to head towards north. Gold, oil, imported cars & electronic articles, foreign education are set to become expensive.

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Yields on 10yr Government of India bonds also rose to 7.31%. As a result, NTPC shelved its Rs. 1000 cr. bond issue & SAIL also deferred its bond issue. Depreciated rupee would also hit hard the finances of oil marketing companies (BPCL, HPCL, IOCL) as India imports almost 80% of its oil requirement. WPI(wholesale price index) inflation for May was at 4.7% which may cross the 5% mark. The stubbornly-high inflation would again coerce the RBI not to lower the rates for few more months. High Current Account Deficit(CAD) at 5% in FY13 may further increase. And Finance Minister would also scramble to keep the Fiscal Deficit which is targeted at 4.8% of GDP for the current fiscal. IT sector companies were expected to gain from rupee decline as bellwethers like TCS, Infosys, Wipro have more than 80% of their revenues from US & Europe. However, they also wont be able to relish much as 25-35% of their receivables are hedged generally. Albeit ONGC which also sells natural gas & earn revenues in dollars, may also see losses as its subsidy bill would swell. A decline of Re. 1 a dollar costs losses of around Rs. 8000 crores to OMCs; oil price also increased by $3 a barrel to $104. The liniment Seeing the carnage at D-street & B-street i.e. bond market, RBI has to suspend bond trading for an hour. To sustain the rupee below 60- psychologically a crucial level, RBI & few companies sold dollars. However at this juncture, RBI cant use this tool for too long because foreign exchange reserves are only around $287 bn or 15.6% of GDP. Chief economic advisor Raghuram Rajan, allaying concerns claimed that enough arsenals are there to choke the decline. As many analysts believe this slide has got nothing to do with local fundamentals. Hence its a shor t-term phenomenon & investors shouldnt panic. Structural problems exist due to which CAD & trade deficit are high. For these, government should sell the India-story & attract more investors. As proposed by Arvind Mayaram, economic affairs secretary, FDI caps should also be increased in few sectors like defense & telecom in which FDI limits are 26% & 74% respectively.

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