Where is the impact of rupee depreciation?

Rupee is on a steep decline. On June 25, 2022, it reached an all-time low of Rs 78.25 per dollar. The exchange rate on 25 January 2022 was Rs 74.17 per dollar. Since then, there has been a decline of about 5.5 per cent. This means that if an Indian citizen had bought a medicine from abroad for one thousand rupees in January, then he would have to pay 55 rupees more to buy the same medicine in June 2022, even if there was no increase in the price of that medicine. Are. If a company had borrowed $100,000 from a US bank, the value of its loan would have increased by USD 5500 or Rs 4,30,375.

The immediate implication is that the cost of imports will increase, leading to a further increase in the price of goods that are already rising for a number of other reasons, such as the increase in petroleum prices due to the Ukraine war, fertilizer prices and transportation costs. Aging and consequent food inflation etc.

The rise in inflation will lead to further hike in interest rates by the RBI, which has already been raised twice this year. This will also hurt investment and growth, which is already showing signs of slowdown.

RBI has not been able to stop and reverse the depreciation of rupee

The RBI is trying very hard to intervene in the forex markets to prevent a major fall in the exchange rate of the rupee. He has been selling dollars time and again but so far he has only been able to save the rupee from a huge fall, but he has not been able to stop or reverse the trend. However, in the process it has been reducing foreign exchange reserves. India’s foreign exchange reserves stood at $642 billion as on 3 September 2021; This was reduced to $593 billion on 24 June 2022. This means that the RBI had already used $49 billion to support the falling rupee.

Capital flight has already become a reality

Another adverse outcome is that there has already been an outflow of foreign portfolio investment of $5.8 billion in FY 2022-23 i.e. in the first 3 months of this fiscal. No wonder the stock markets also show free fall.

Deteriorating trade balance and balance of payments

In theory, a fall in the value of the rupee leads to an increase in exports. But in practice this has not been happening much in the last one year as overall inflation has neutralized the impact of cheap rupee to some extent. Export growth declined from 25.1% in February 2022 to 19.8% in March 2022. Further, if exports grew by 43.8%, imports at higher prices grew 55.1% in FY22. Hence the trade deficit in FY 2022 was a record $192.4 billion!

Why is the trade deficit increasing continuously? One of the main reasons for this is the continuous fall in the value of the rupee, as imports are becoming costlier. As a result the balance of payments deficit is also increasing. This will bring down India’s rating by international rating agencies. As a result, foreign investment, which has been showing huge growth in recent years, will further decelerate and cause further damage to growth.

Erosion in corporate profit margins

India Inc. in September 2021. U.S. foreign borrowings stood at $23.28 billion and this debt increased to $38.5 billion as of May 15, 2022. Rupee depreciation would have contributed at least 10% of this growth and the rest came through additional borrowing. If the rupee depreciates further, the interest on this loan will increase accordingly. Hence corporate margins will fall and share prices will fall.

A study by Bank of Baroda shows that the net profit of the Indian corporate sector (2108 companies studied) is Rs 4,54,385 crore in FY19, Rs 2,85,946 crore in FY20, Rs 5,47,986 in FY21 crore and was ₹8,63,399 crore in FY22. Indian companies have recovered from the recession and the impact of the pandemic in FY20 and crossed the pandemic level in FY21 itself. And, not only this, they also reached a record level of Rs. Huh . Even if we exclude the extraordinary growth in the post-pandemic year due to the low base effect, Indian corporate profits grew by 57% in FY22. Rating agency ICICI Securities estimates that the profit rate of corporates will decline by 15-30% in FY2023.

Turmoil in the stock markets

The fall in the value of the rupee also affects the fall in the stock markets. The stock markets have seen many small crashes in the last one year. The Bombay Stock Exchange Index Sensex was at a record high of 62,000 in October 2021. Today, it stands at 52,729, wiping out nearly Rs 50 lakh crore of investors’ assets. Similar to the Sensex, the Nifty Index stood at 17,300 in February 2022 and has fallen to 15,699 on June 25, 2022. Rise in inflation and fall in corporate profits are closely linked to the fall in stock markets, and are largely due to the devaluation of the rupee, among other reasons.

The loss of investors’ wealth is only one side of the story. Promoters are unable to raise fresh capital from the stock market. According to SEBI data, while 15 fresh IPOs (initial public offer of new shares) raised Rs 35,000 crore in November 2021, 10 IPOs could raise only Rs 5000 crore in March 2022. LIO IPO, which is the biggest IPO in the history of Indian stock market, turned out to be the biggest flop! Now the government’s disinvestment target is in limbo. Indian industry had not only raised Rs 250 lakh crore capital from stock exchanges so far, 6.5% of the total revenue of the Government of India has been targeted to be raised from stock markets through disinvestment. Due to depreciation of rupee, both will suffer.

Adverse fiscal impact

Finally, in fiscal terms, a fall in the value of the rupee would increase the import cost, and hence the subsidy bill on petroleum products, fertilizers, and indirectly the food subsidy bill would also rise (because of open market prices and The difference between the prices of PDS will increase). The current coal crisis will also deepen due to the increase in the coal import bill. The allocation for social sectors in the Union Budget for 2022-23 was already affected and now the welfare expenditure will be further reduced.

Deteriorating external environment

Beyond the immediate effects of the Ukraine war, the general global economic scenario is also turning hostile to India; It was like sprinkling salt in a wound. Global inflation is projected to rise to 6.7 per cent in 2022, double the average of 2.9 per cent recorded during 2010-2020. Inflation in the US had reached an all-time high of 7.9% in 40 years, even before the increase in oil prices prompted by the Ukraine war. After the war, the US inflation rate in May 2022 was 8.6%. The US Federal Reserve raised interest rates to 0.75 percent on June 15, 2022, the third this year and the biggest increase since 1994. This is one of the reasons for the outflow of institutional investment from India in the immediate context. This will increase the debt-servicing cost of Indian companies that have taken huge debt (in dollars) from abroad.

The European Union is already in a recession. Real European GDP is projected to grow by 2.65% in 2022 and 1.6% in 2013, following a negative growth of -5.9% during the 2020 pandemic year to a positive rebound of 5.4% in 2021.

The IMF estimates that global growth will fall from 6.1% in 2021 to 3.6% in 2022 and will remain at the same level of 3.6% in 2023. A record high growth of $250 billion in services exports and $417.8 billion in merchandise exports and an equally record growth of $83.57 billion in Indian recovery in FY 2021-22 from the pandemic devastation in 2020-21. It may be difficult to sustain both, given the negative global cues.

In a nutshell, fiscal and monetary tightening, particularly in all major economies including the United States, slowdown in the European Union, and the recent Covid-19 surge in China and the slowdown in the backdrop of lockdowns, are all indicating that for the Indian economy, The external environment will only worsen. .It does not matter whether the global economic crisis is as in 2009 or not, the emerging global economic scenario is not going to be favorable in the two years before the general elections in India.

For the sake of stability in prices, the Modi government and the RBI may choose to forego growth in the coming two years. Talking about the unemployment scenario, its result will be ominous. The explosive situation over Agneepath, although it concerns a small section of the unemployed in search of army jobs, reflects widespread youth anger and signals the political consequences of the unemployment crisis. This can affect the youth vote of the BJP to a great extent. Surely the times ahead will be bad for Modi.

The above points show the empirical scenario of the economy. So, has the rupee already reached the downside or will it fall further? Experts from Swiss rating agency UBS and Japanese Nomura have predicted that the dollar-rupee exchange rate will touch Rs 81 per dollar by November this year.

One of the ironies of global capitalism is that due to rising inflation in the United States, the US Federal Reserve is raising interest rates in the US. As the EU and China face recession, the US dollar will become a safe haven for them in terms of ‘parking funds’. The dollar will remain high even if the US economy slows down. On the other hand the external market for India will shrink. But the more the value of the dollar rises, the more the rupee will depreciate. In today’s global political economy, exchange rate movements governed by a rising dollar have made developing world exports cheaper and cheaper. The drain of resources from the developing economies to the imperial economies in this neo-colonial period probably far exceeds the direct plunder of the colonial era.

India has adopted the policy of controlled floating exchange rate mechanism, where the exchange rate will be determined by the market forces subject to RBI intervention. As a result currency volatility has proved to be a boon only for currency speculators and not for manufacturers or consumers. Similarly, globally, the daily volume of trading in the commodity spot market and $2 trillion in forward trading in the commodity futures market comes from the combined exports and imports of 35 of the world’s largest economies. times higher. Such huge global speculation also fuels currency volatility.

However, there are limits to RBI’s intervention. At present, India has 10 months’ worth of imports in the form of foreign exchange reserves. But some unforeseen kind of extreme change in the external environment can halve it in just 2-3 months. True, India is not Sri Lanka and the Indian economy is nowhere near the 1991 scenario. But a steady fall in the value of the rupee would be a disaster and could take the country closer to a scenario that would be politically critical in the next few years.