What drove, and who wins from, rupee's fall

All of us know that what goes up has to come down. But what has remained stable has also suddenly turned volatile.

Yes, it is the season where the rupee has developed slippery feet and has ‘depreciated' against the dollar. In other words, while the exchange rate of the dollar vis-à-vis the rupee was at 44-45 levels just a little while back, it is now at over 49 levels. This has caught many investors off-guard.

Forget investors, now your higher education in the US will cost you as much as 10 per cent more, as you have to shell out more rupees to buy dollars.

But at a much broader level, what has led to the fall in the rupee, which set of companies would benefit from it and who would find the going tough? Here we try and answer these questions and highlight how currency fluctuation is handled by different players.

Domestic triggers

Generally, the strength of any country's currency is determined largely by the level of economic progress achieved. So the US and much of Europe, which are developed economies, and their currencies are the most traded and sought after in the world. But given that these economies are facing severe debt challenges and anaemic growth prospects, their currencies have come under strain, especially as China and India are now growing at superior rates.

That would mean that the Indian currency should have appreciated and not gone in the other direction. What has happened in recent times may be attributable to certain domestic factors. Markets around the world, including India, have been in turmoil.

Closer home, foreign institutional investors have been resorting to heavy selling over the past several months. This means that they are selling rupees and taking back dollars, making it dearer. In 2008-09, the rupee depreciated to 51 levels. The other key aspect is the fact that the RBI has been constantly increasing interest rates, thus making the cost of money to rise, which has also meant lesser quantum of rupees available in the system. This is also the season when oil marketing companies buy dollars for importing crude from other countries — dependent as India is for its energy requirements — given that billions of dollars are bought by these companies from the RBI to be paid to the oil producing countries.

This means that the dollar becomes scarce and therefore comes at a premium. Many analysts, though, feel that the rupee depreciation is a temporary phenomenon and that we revert to earlier levels over the next 5-6 months.

This is precisely because of the reasons mentioned earlier about developed economies slowing down and countries such as India growing at 7 per cent plus levels. This should result in greater capital and market inflows in the form of dollars.

Interest rates in the US and Europe still continue to remain at very low levels and is expected to remain so for the foreseeable future. This means that the dollar or the euro would not get dearer against other emerging market currencies.

The key beneficiaries of the rupee appreciation are of course exporters, as they would get more rupees for the same amount of dollars. So, IT companies that derive over 60 per cent of their revenues in the form of dollars would stand to gain, even though the phenomenon has started only over the past 3-4 weeks.

Hedge mechanism

Normally software companies are ‘comfortable' with an exchange rate of Rs 44-45 and hence anything above this is a bonus for them. These companies hedge their dollar inflows at a particular rate in the form of futures or options contracts to specific levels in the 44-45 range. In the present circumstances, they would benefit to the extent that they are not hedged.

Analysts expect Infosys to benefit more as it does lower and short-term hedges, while TCS and HCL Technologies, which hedge a larger part of their inflows, may not gain as much. Companies such as MindTree that hedge 40-50 per cent of their projected cash flows would also stand to benefit.

One percentage gain in the dollar rate gives IT companies 30-40 basis points increase in operating margins.

The key losers would be oil importing companies, which have to pay more rupees to get the same quantity of dollars.

In fact, petrol prices have been raised by Rs 3 already by the oil marketing companies. So BPCL and HPCL would stand to lose, when rupee falls adding to retail consumers woes as costs are ultimately passed on.

Steel producers such as SAIL, which import coking coal, would be facing a higher bill. Even foreign exchange loans would be costlier.

Indian companies have large amounts of debt in the form of foreign currency convertible bonds and external commercial borrowings denominated in dollars.

Corporates would have to shell out more to repay the interest and principal components.

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