Flashback 2013, India was at the forefront of the broader sell-off when the US Federal Reserve was tapering Quantitative Easing (QE) purchases. The Balance of Payments was in a weak position then and the rupee had depreciated from 58 to 68 levels within a very short span of time and many economists were predicting the rupee would touch 70 levels.

Fast forward to 2018, as the US Fed is about to get more aggressive in hiking interest rates, India is feeling the heat again. The rupee has witnessed depreciation vis-à-vis the US dollar with the dollar rate dropping from Rs 65 to Rs 67.5 during March 28, 2018 to May 15, 2018. This can be put in the context of global developments where several currencies have depreciated against the dollar as well as fundamentals.

Among emerging market currencies, the Philippine Peso is the only currency that appreciated against dollar by 0.09 per cent during the period. Among currencies that witnessed depreciation, Argentina Peso recorded the highest depreciation (17%), followed by Turkish Lira (9 per cent), Brazilian Real and Russian rouble (8 per cent). The Indian rupee during this period has depreciated by 3.8 per cent and depreciated by a massive 6.51 per cent between January to date.

On Friday the rupee fell by 30 paise against its previous close to end at 68 against the dollar and many economists anticipate a further fall in the coming months on the back of a host of global economic factors. While a fall in the rupee slows economic growth, impacts corporate earnings and causes market volatility, it also hits the common man hard impacting not just the grocery bill but also planned vacations abroad or studies in a foreign country besides hurting investments. However, a depreciating rupee is good for exports and helps in job creation.

Let us first see how the rise and fall of the rupee impacts you:

Grocery Bill

A falling rupee increases the cost of imports which has a direct bearing on inflation. India imports large quantities of crude oil, fertilisers, medicines, pulses and iron ore, all of which will become costlier in tandem with the falling rupee. Since India depends on imports for a large part of crude oil it consumes, a weak rupee will influence petrol and diesel prices. Fuel is directly connected to the cost of transportation and as a result, the prices of goods that are transported from one state to another using trucks such as vegetables and manufacturing items will become costlier which would impact your household budget. Cost of FMCG or fast moving consumer goods such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive. Gems and jewellery too and electronic items will become expensive as well.

Home loan EMIs

The RBI has been taking steps to curb rupee volatility. But the rupee’s path is also decided by global economic factors. Overall, if the rupee doesn’t strengthen, then inflation will go up too. The RBI would have to raise the repo rate to curb inflation. Repo rate is the rate at which commercial banks borrow from the central bank. As seen in the past, banks are prompt to pass on the cost of higher interest rates to the borrowers. This means that home loan rates, car loans, personal loan rates and even corporate loans will become expensive. The rise in government bond yields, started in middle of 2017, was initially driven by fiscal uncertainties and rising demand-supply imbalances. The 10-year G-Sec yield has already risen by 107 basis points from July 2017 to May 5, 2018. Left with very limited options, if the rupee continues to slide due to a combination of internal and external factors, RBI will have no option but to raise the repo rate. Most economists and dealers expect two rate hikes from RBI this year.

“If the rupee depreciates, it will be inflationary and compel the RBI to hike interest rates. So home loan rates, personal loan rates and cost of industrial credit will increase. Beyond a point, rupee depreciation will be negative for the stock market and the bond market,” said Anindya Banerjee, currency analyst at Kotak Securities.

Impact on stock investments

Although an individual stock market investor cannot control volatility, it can use some strategies to enhance his returns.

Whenever the rupee falls, industry sectors that are linked to exports get benefited such as information technology, pharmaceuticals and chemicals and engineering services companies with contracts outside India. In the same way, importers lose money if the rupee falls. Since India imports 80 per cent of its crude needs, stocks of oil marketing companies (OMCs) will be negatively impacted.

Global oil prices have crept closer to $80 per barrel, a level it has not seen since November 2014, as supplies tighten while demand remains strong. This rise can be ascribed to increased concerns over supply disruptions following US sanctions on Iran – Iran contributes 11-12 per cent of the total OPEC production. Declining output of OPEC’s biggest producer in Latin America- Venezuela and recent geopolitical tensions in the middle east region further led to a rise in oil prices. Going forward, with demand only coming in during September-December, the movement in oil prices in the coming months will largely be determined by supply factors.If OMCs like Indian Oil and others absorb the rise then it will have to incur losses. Any loss to these OMCs would lead to a fall in their share prices resulting in losses for their shareholders.

Similarly, India imports raw material such as copper, electronic goods such as cell phones and I-Pads. The share prices of the companies concerned would get negatively impacted.

Two groups of companies

Indian companies can be divided into two groups based on the impact of currency fluctuation on their stock price and profitability: net exporters and net importers.

Net Exporters: These companies sell their products to the outside world and receive payment in foreign currency. Whenever the rupee appreciates as compared to these currencies, companies are exposed to translation loss as they can buy fewer rupees with same amount of foreign currency. This translation loss hurts their profitability since the raw material cost is in rupees terms. The company’s profitability increases in case of rupee depreciation.

Net Importers: These companies buy products from the outside world and make payments in foreign currency. Whenever the rupee appreciates they are able to buy more foreign currency for payment resulting in overall translation gain. Profitability of these companies increases in this case and similarly, profitability decreases when the rupee depreciates.

Says Saravana Kumar, chief investment officer at LIC Mutual Fund, “Even if the rupee falls by 6 per cent, the stock market continues to hold. This is because some appreciation is seen in sectors where the rupee depreciation is beneficial such as IT, pharmaceuticals and chemicals, fertilisers and engineering service providers. At the same time, sectors that import from outside such as OMC, capital goods, electronic goods will be impacted due to rise in raw material prices due to rupee depreciation.”

“Investors will have to rejig their portfolio and have more weightage on export-oriented sectors and reduce weightage in the industry sectors that makes impact due to rupee depreciation,” added Kumar.

Impact on debt funds

Since G-Sec yields are volatile, the bond market is witnessing volatility. Your investments should be towards short-term funds or liquid funds.

Impact on jobs and salaries

If you work in industries that are importers, the rupee fall may also result in shrinking pay cheques. If the rupee fall is steep, then industries that are dependent on imports will see an increase in production and operation costs. To keep their margins intact, these companies could cut cost by laying off people or giving out lower increments or putting a freeze on hiring. On the other hand, the rupee fall is good news for industries that earn in dollars — exporting companies — and could dole out decent salary hikes this time.

Impact on foreign investments

The falling rupee is a recipe for slowdown in economic growth. If the fall of the rupee continues, foreign investment will dry up in India thereby creating a gap between investment required for growth and actual investment. This may not happen in the immediate future, but this cannot be ruled out altogether. A consistent fall of the rupee may also take hot money ie FIIs out of India. While domestic investment in slowing down at a fast pace, a slowdown in foreign investment at this juncture will strongly impact economic growth. Slowdown does not just impact the creation of jobs it also has potential for leading to job losses.

Impact on overseas education cost

Those looking to study overseas will have to shell out more money considering the increased value of the dollar against rupee. When students go for education to a foreign country – the US, for example – they pay fees and incur expenses in dollars. When the rupee goes down, more rupees are needed to buy dollars. Hence, rupee depreciation adds to funding requirement. The increasing cost of education will impact those who go abroad but also study at home. A large number of students take international examinations. Certifications in information technology are given online or through distance learning which requires payment in dollars. A falling rupee could hurt these students.

According to HSBC’s 2017 report, ‘The Value of Education: Higher and Higher’, the US emerged as the top choice for parents considering a university abroad for their children but also one of the most expensive. Parents paid an average of US$58,464 towards their child’s education in the US per year, which included tuition fees, transport, books and accommodation.

Assuming a student plans to study at a US university and takes a bank loan, he estimates that he will need $50,000 for his entire education. At an exchange rate of Rs 60 to a dollar, he will need Rs 30 lakh. The student applies for an education loan. However, by the time he is about to pay the fee and go to the US, the exchange rate goes up to Rs 70 per dollar. The student will now require Rs 35 lakh and his loan requirement will increase.

The students to gain from rupee depreciation are those who have already completed their studies and are about to begin repaying their loan. For them, the depreciation of rupee means fewer dollars to be paid back to the bank.

What can be done to manage the fall? The first option should be to speak with the bank and ask for a further loan. Banks have top-up schemes for education loans where they fill the gap created by the exchange rate fluctuation. This will certainly increase the payback amount but it will help students continue with their studies.

The other option is to wait and watch the RBI action on exchange rates. Typically, the RBI intervenes when the exchange rate falls by more than 3-4 per cent. However, this option is fraught with risk. Every rupee slide has reasons behind it. Sometimes, the reasons are manageable and hence the RBI takes action to restore the rupee at a certain level. Sometimes there are structural reasons for the slide. In such cases, even RBI may not have much say.

FOREIGN VACATIONS

The falling rupee is bad news for itinerant Indians and vacationers. However, that holiday package you booked in advance before the rupee fell is safe.