Will Rupee Breach the 70 Level?

Mon, 25 Jan Pre-Open

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The rupee is on a declining trend, depreciating by around 6% since the levels seen in August 2015. As I am writing, rupee has breached the levels of Rs 68. The huge foreign outflows have been a driving force for a weakening rupee. Foreign Portfolio Investors (FPIs) have withdrawn a mammoth sum of Rs 356.09 billion from the local equity market since August 2015. The withdrawal of capital from FPI leads to increasing demand for the dollar, thereby putting significant pressure on the rupee.

To add to the woes, China depreciated yuan by around 6% since 10 August 2015. Now, how this affects India? Depreciation of yuan makes China's exports less expensive as compared to India. Thus, global demand for Indian manufactured products reduces considerably. Assuming, Indian domestic manufacturers will be shattered by the depreciating yuan, FPIs are withdrawing even more capital. This puts further downward pressure on the rupee.

Recent fall in the rupee has induced many experts to write about it. If the so-called experts are to be believed, namely Barclays, UBS, Morgan Stanley, Royal Bank of Scotland, the rupee could breach the 70 mark to the US$ this year. It is also surprising to note that even at current levels, the rupee is overvalued as per Real Effective Exchange Rate (REER) index. As per the index, the rupee could depreciate further from current levels.

Who will feel the pain of the weakening rupee? Companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials. Further, companies who import a majority of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure. RBI gave repeated warnings to corporates to hedge their foreign currency exposure. However, according to data available, huge chunk of corporates have yet not hedged their foreign exposure, thus exposing themselves to the falling rupee.

Further, India imports more than 80% of its oil requirements. A rise in the dollar also leads to a consequent rise in the import bill. Currently, oil price is hovering around their record lows and thus a rise in the dollar won't contribute much to the import bill.

Looking at the brighter side, rupee depreciation brings a cheer on the exports front. India's exports have contracted for the 13th month in a row. A depreciating rupee will provide a much needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too; the government needs to address to get the exports back on track. Presently, currencies of majority of emerging markets are falling. During such time, if India's currency does not depreciate, it could make the Indian exports uncompetitive as compared to the other countries.

Going forward, we won't be surprised at all if the rupee breaches the 70 levels. Provided the depreciation comes at a measured pace, long-term investors should not fret about the same. The RBI has enough foreign exchange reserves to stabilize the rupee in case of a freefall. Thus, we believe investors should not worry much into the falling rupee. We agree with a recent article in Livemint that states we should think of 70 as the new 60 for the exchange rate and move on.

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