Rupee at 70, what should you do?

Rupee at 70, what should you do?

The rupee, on August 16, slumped 43 paise against the dollar to trade at a life-time low of 70.32 on strong demand for the US currency.

As India celebrated its 72nd Independence Day, the Indian rupee breached the 70-mark for the first time ever in its history. This record low level was a result of economic problems in other emerging countries like Turkey and China.

The rupee, on August 16, slumped 43 paise against the dollar to trade at a life-time low of 70.32 on strong demand for the US currency. At the Interbank Foreign Exchange, the local currency opened at a record low of 70.25 a dollar, down from its previous close of 69.89, and weakened further to trade at a fresh low of 70.32. Forex traders said besides strong demand for the American currency from importers, capital outflows mainly weighed on the domestic currency.

A sharp surge in trade deficit too impacted the rupee. Trade deficit soared to a near five-year high of $18 billion, according to data released by the Commerce Ministry. Furthermore, depreciation of the Turkish lira against the dollar after the US imposed tariffs on steel and aluminium imports also put pressure on the Indian rupee, they added. A wide cross-section of companies, mainly importers and those who go on vacation abroad and students planning to go for studies to foreign universities are worried a lot with the falling rupee. With the rupee navigating unchartered waters, is it a time to worry? Let’s find out.

No need to panic

The bad news is that the rupee has touched 70. But the good news is that it is not time to panic yet. The Indian economic affairs secretary, Subhash Chandra Garg has said that the fall in the rupee against the dollar was due to the contagion effect. It means the problems in one country affect other countries as well. Following the downslide in the Turkish Lira on August 14, the rupee breached the 70-mark for the first time ever. And with China using the tactic of currency devaluation to boost its exports, the Rupee slide has continued. However, as long as the depreciation is in line with other currencies, there is nothing to worry, according to the government.

According to Niti Aayog, the falling rupee is not a cause of worry as it is getting back to its natural value. “The rupee rose by about 17 per cent during the last three years. Since the beginning of this year, rupee has declined by only 9.8%. So, it has recovered. It is rather coming back to its natural value,” Niti Aayog vice-chairman Rajiv Kumar said.

Rupee should be realistically valued and should not be overvalued, he said, adding that the exchange rate is a price which should reflect true equilibrium between demand and supply. He pointed out that one should not be under the impression that appreciation of rupee is a sign of a good economy.

Countermeasures by the RBI

The Indian rupee has lost around 9.3% during this year alone. This makes it one of the worst performing currencies in the market. But in the last few days, the economic crisis in Turkey has created further problems for the rupee. In response, the RBI stepped in and took countermeasures. It sold dollars through the public sector banks in order to prevent a further slide in the rupee. Surprisingly, the Sensex ignored the rupee landslide and gained as much as 207 points on August 14 as a result of sustained buying support.

What happens to IT and pharma companies

A weak rupee is not all bad news. Some sectors in the Indian economy do benefit when the rupee reaches lower levels. The IT and pharma sectors are a couple of examples. IT companies like Tata Consultancy Services (TCS), Infosys and Wipro earn nearly 60% of their revenues in US dollars. As a result, a depreciating rupee has a positive impact on their profit margins.

Similarly, pharma companies like Sun Pharma, Lupin and Ajanta Pharma which have a large exposure to the US market stand to benefit. While exporters gain from the rupee fall, importers in the country will be hit. This is because the cost of getting goods and equipment to India would increase. As the rupee weakens, an importer would have to spend more Indian rupees in order to purchase the same product that he bought at a lesser price previously. Oil companies are generally hit the hardest when the rupee value declines.

The rupee’s response to the contagion effect has not been anything too surprising. It mirrors the currency patterns of most emerging nations in wake of this sudden crisis. As of now, the government has taken a bold stance and said there is nothing to worry. However, with high crude oil prices and global trade tensions brewing, it is important to monitor the rupee’s progress and see how it pans out in the near future.

With inputs from Kotak Securities Research

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