Rupee collapse confounding, but hopes remain

Economy: Speculation overseas is seen as a factor in the sharp fall of rupee, which nosedived to 68.85 on August 28.

Let’s face it. The battered Indian rupee is still in an overshot territory. Till now, it has fallen so ‘fast and furious’ that even chartists - as technical analysts in the forex markets are also known - could not figure out which way the local currency’s future is headed, for sure. 

For the record, rupee has dipped consistently below all reasonable technical targets since breaking its then record low of 57.32 to the dollar on June 10. Percentage-wise, rupee has tumbled nearly 20 per cent this year, amid interventions by Reserve Bank of India (RBI) and the government, to close at 65.70 against dollar on Friday last.

Weak economic growth, a record high current account deficit and concerns over the government's finances, apart from surge in global crude prices triggered by Syrian crisis are proving a toxic mix for the already weak rupee, which saw its fastest one-day fall on Wednesday last to 68.85. It also led to a carnage in Dalal Street with huge slump in the premium indices of the country’s two popular bourses, BSE and NSE.

However, the RBI’s latest step during the mid-week providing a special window effective immediately to sell dollars to three PSU-oil marketing companies - Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum - seeks to remove major source of dollar demand from the spot market (worth $500 million daily) and thus reduce downward pressure on the rupee. It also led to improving investor sentiments in the country’s stock markets for the week-ended August 30, 2013.

So, the market may have bottomed out for now, yet the international turf still remains tough, says Standard Chartered Bank's Co-Head of Wholesale Bank (South Asia) Ananth Narayan. “Even in this hazy situation, one cannot ignore green shoots like a likely fall in August trade deficit data and opening of oil window by RBI to stem rupee’s fall,” says he.  
“August trade deficit could be below $10 billion and the CAD (current account deficit) could be close to zero for this month. These are medium term positives. We are heading to a situation where the worst is likely to be behind us,” he adds with hope.

Even Prime Minister Manmohan Singh last Friday tried to assuage sentiments insisting that India’s fundamentals remained sound. But how many would agree with his plea with persistent inflation, which itself has eroded the value of Indian currency significantly, fledgling government finances and country’s overseas trade slowdown. The country suffered decade-low growth of 5 per cent in the fiscal year that ended in March, and the latest GDP numbers suggest this year would be worse.

One school of thinking right from the beginning felt that the use of the severe interest rate and liquidity tool may not help the currency much. At best a marginal effect on the currency, says HSBC's Managing Director Hitendra Dave adding: “But it may have significant collateral damage on the fixed income market, equities market and also wider issues of growth.”

Most of the companies complain they cannot plan more than 2-3 months ahead as rupee furiously falling drives up the cost of imports, forcing them to raise prices even while consumer spending crumbles. Basically, companies work at one exchange (dollar-rupee) rate and the very next day if the exchange rate changes, it becomes difficult to plan. 

Those who import finished goods or raw materials are the worst hit as they scramble to hold onto margins and balance the need to raise prices without deterring buyers. “How can a business operate when the currency is in free fall?,” asks Videocon Industries’ business head H S Bhatia explaining the currency selloff has since intensified, compounding difficulties for the Group, which has many businesses, including television and home appliances. 

Echoing similarly, another home appliance maker Whirlpool of India’s Vice President (corporate affairs & strategy) says: “We are now planning for a month or three months at best, unlike six months or a year earlier.”

Shoppers cut back

It is tough on shoppers too as the collapsing rupee pushes up the price of goods, adding inflation to meagre urban salary hikes and an economy growing at its slowest pace in a decade. So much so, they are cutting back not only on big-ticket purchases such as refrigerators, TVs or high-end branded apparel but staples like soaps, shampoos and condiments. 

Hindustan Unilever concedes to posting lower sales volumes for a fifth straight quarter in June. HUL’s executive director Manish Tiwary says: “India is witnessing a slowdown and only recently, in the past quarter, has it been so pronounced.” Apparel retailer Provogue - which shut several stores in the past 12 months - is moving cautiously on expansion with a focus on franchisee-run stores. Its business head Timothy Eyon says: “t is a tough environment to operate in, as consumers here are seeking even more value in the current market that impacts both sales density and margin.”

Many consumer companies have resorted to prices increases, long-term supplier contracts and hedging are helping some now. But then hedging also comes at a cost. 

Daimler AG’s Mercedes Benz has held off on a price hike even though it faces severe margin pressure from the sliding currency but is now relenting. Its MD & CEO Eberhard Kern says the company has been "absorbing a significant portion of these impacts" until now, but to "run a sustained and profitable business in the long run, revising the prices upward was inevitable." 

Where is the troubled rupee headed?

In times like this it is best to be calm and reflect on things a little dispassionately, says Stanchart’s Narayan. He also points out there are positives and negatives. The positive, according to him, is the CAD which is improving, the trade deficit already reduced in June and July, while in August it could be below $10 billion and the CAD could be close to zero for that month.

On the negative side, says Narayan, very few expected a run-up of rupee close to 69 per dollar which not only shook markets but rattled them altogeter. 

Long term solution

The only stable and long term solution for the government at this juncture is to boost invests as investment-led growth would create jobs, reduce government’s urge to depend on hot money to finance its deficits, take care of whopping subsidies and reduce pressure on the rupee. Finance Minister’s assurance to the Lok Sabha about government’s commitment to a 10 point programme to embolden reforms has been welcomed by the investors but they fear governmet’s inaction as in the past. Global investors don’t view India through adverse prism. Notwithstanding the recent dollar outflows, they think at worst case India will grow at 4 per cent and in good case at 5.5 per cent. “It may be less than the potential but we are still far better than a vast part of the world,” says HSBC’s Dave.

Also, Dave elaborates, FIIs see that some things have been set into motion which only takes a long time to address like reforms in coal-linkages, power sector reforms and others, in short infrastructure projects are stuck. 

If the government can get that part clarified, can give some relief to banks and stuck infrastructure projects, then that gives a huge sentiment booster to people who still believe in dollar rupee or India growth in the long run.

An expert rightly puts it, “Market is all about sentiment. The sentiments at this juncture have been hit because of UPA’s inability to take courageous steps”.

(Inputs: Annapurna Singh in Delhi.)  

Weak economic growth, a record high current account deficit and concerns about the government’s finances have presented a fatal concoction for the rupee for which August turned out to be the worst month when it fell like a pack of cards. A report...

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