How does the Rupee's fall affect YOU? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How does the Rupee's fall affect YOU? 

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In this issue:
» SEBI reforms buyback rules
» Will direct subsidy transfer for kerosene ever happen?
» Does US data support tapering of QE?
» The reason behind China's money market crunch
» and more....

The Indian Rupee dipped to an all time low yesterday. It breached the psychological barrier of 60 to dollar. There were many media reports and expert opinions on how it could sink further. Fortunately the Rupee recovered a bit today on the back of good news on the current account deficit as it dipped to 3.6% of GDP. But this could be just a momentary breather for the Rupee. There are several structural issues that have gripped our economy that have lent weakness to the Indian Rupee. Now you would have read a lot on how the fall in Indian Rupee would hurt the economy and imports and companies. But many would be wondering as to how this fall would affect them as individuals.

The fall in the Rupee actually has quite a big impact on us. For the starters it has a big impact on our travel plans. As the rupee falls overseas trips would naturally become more expensive. But the fall in rupee impacts our day to day lives as well. You see India is largely an importing nation. Our imports outweigh our exports. Amongst the things we import, the most crucial is oil. As rupee declines, our oil bill goes up. This would have a direct bearing on the fuel costs in the country. And needless to say that fuel is actually a lifeline for our economy.

If fuel costs go up then everything that depends on fuel, would also see prices going up. This means that transportation becomes more expensive. If transportation becomes expensive then the cost of our groceries and food items goes up. As prices go up, we would again be gripped by the monster of inflation which would burn a hole in our wallets.

On the other side, a fall in rupee has a negative impact on our investments as well. The stock markets tend to have a knee jerk reaction to a steep fall in rupee. As such these are very short term issues. But the bigger problem is that related to FIIs (Foreign Institutional Investors). A fall in rupee affects the dollar value of the FIIs investments in the country. Therefore such declines tend to spook them. And this leads to an exodus of money from the Indian markets. This in turn sends the prices of asset classes tumbling downwards. This is something we have been seeing in the financial markets though we do feel that such events should be seen as buying opportunities by long term investors.

As such a fall in the Indian Rupee is not good news either for the economy or for the corporate world or for us individually. It messes up everyone's budgets and lives. The Reserve Bank of India (RBI) has interfered in the foreign exchange markets time and again to help the rupee. The onus of helping the Rupee in the long term now lies on the government. They have to make policy changes and control the deficit problems. At the same time the government also has to take the necessary steps for boosting investor confidence in the country. These steps should help the Rupee stabilise in the long run. But will the government act on this front or would it prefer to spend time on trying to win the next general elections?

How do you think the fall in Indian Rupee affects you? Please share your comments or post them on our Facebook page / Google+ page

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01:15  Chart of the day
With global interest rates hovering at near zero levels, India Inc used FCCBs (Foreign Currency Convertible Bonds) and ECBs (External Commercial Borrowings) to fund their businesses. But now these 'cheap loans' are turning out to be something of a curse for the companies. As per RBI's data, a large part of these loans are coming up for repayment in this year. These are related to the approvals made during FY07 and FY08 which as shown in the chart are sizeable amounts. With the steep fall in the rupee's value, the repayment amount related to these loans has gone up. The Business Standard estimates that the principal repayment cost could go up by 25 - 30% due to the fall in rupee's value. This would further hurt the financials of the companies that are already stretched thanks to the tough business conditions in the economy.

Source: Business Standard

Stocks buybacks are usually interpreted as a sign of promoters' keen interest in the company. An attractive offer price therefore leads to considerable interest in the stock. On many occasions the market price of the stock moves well above the buyback offer price. But then again promoters with vested interests do not abstain from misusing such opportunities. As per market regulator SEBI, some companies have had buybacks open for as long as a year. But what stumped the regulator is that the promoter did not actually buy any shares throughout the period! Needless to say, in such cases, the buyback offer was used as means to prop up the company's share price. The SEBI new guidelines aim to thwarts such vested attempts. As per the revised guidelines, the buyback duration is restricted to six months. Also the company cannot raise capital for a year after the buyback. We believe the regulations will bode well to protect the interests of minority shareholders.

The government introduced the direct cash subsidy system in the current year. This move would help it reduce its subsidy burden. Also, it would assist in waning out the shortcomings of the old subsidy system. The direct cash subsidy system is being used for domestic LPG. However, it seems there will be a delay for kerosene (sold through the public distribution system). The same was to be introduced in the current year. But now seems likely to be introduced only after the elections next year. A leading business daily believes the delay is on account of the government's unwillingness to increase prices for the widely used fuel in fear of losing public support. What is the real reason is anyone's guess. But given that pilot projects seem to have been successful in terms of keeping diversion in check and for identifying the beneficiaries, this project should be implemented at the earliest. Especially at a time when the government needs to keep its expenses under control!

Last week, the Federal Reserve send the market in the frenzy when it announced that the Fed could start cutting back QE later this year and may stop entirely by the middle of 2014 if the economy continues to improve. Earlier, the Fed unveiled a set of revised economic projections that were slightly more optimistic than its previous estimates. If those projection pan out, the Fed will ease the pressure on the accelerator. However the recent economic data might put a dent in the Fed's plan. The US GDP growth rate for the first quarter was sharply revised downwards. The GDP was revised from 2.4% to 1.8%. This was on back of lower consumer spending in the US. This suggests that U.S. economy may not be strong enough for the Federal Reserve to slow its bond purchases later this year.

China is already feeling the heat of its economy slowing down. But that's not all. Because of a crackdown on currency speculation, the country's money markets were suddenly faced with a cash crunch. This has led to a sharp rise in borrowing costs. And the implications of this have spilled over to the global markets as well. This cash crunch is also the fallout of another crackdown on banks' wealth management products (WMPs) and transactions between banks' on and off-balance sheet funds since the start of the year. The signal that the People's Bank of China (PBOC) seems to be sending is that Chinese banks need to secure funding through good old fashioned deposits. And not through the flighty money markets. Chinese banks have already been under fire in recent times on account of their indiscriminate lending to the property markets as a result of which bubbles began to form there. Thus, this development does come at an inopportune time. For the short term, the PBOC has lined up some measures to ease the cash crunch. But in the longer term it needs to put in more effective practices in place to curb the reckless speculation that seems to have taken centre stage in the Chinese financial markets.

In the meanwhile after opening the day on a firm note, Indian equity markets continued to trade in the positive territory. At the time of writing, the Sensex was up by about 304 points (1.6%). Other than China, nearly all of the major Asian stock markets have closed the day on a positive note with Japan and Korea leading the pack of gainers.

04:55  Today's investing mantra
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    8 Responses to "How does the Rupee's fall affect YOU?"

    O.P. Makhija

    Jun 28, 2013

    Whatever you have stated in the article is perfectly logical. But there is a positive aspect also with the fall in rupee. Fall in rupee means everything will become more expensive in rupee terms. Ultimately the manufacturing and trading companies will pass on the increased cost to the consumers. Their profits will go up in rupees terms. This will lead to increase in stock prices with a time lag. Another well-known positive aspect is potential for increased exports and possibility of fall in imports. This may help local manufacturing because imported products like cars and many other goods will become expensive.

    Like (1)


    Jun 28, 2013

    By reading the article, it seems that the fall in rupee vcalus vis a vis the dollar is a grave problem. But is it not a correction of value. while India has seen very high inflation in the last few years US in comparison has not. So the erosion of money value need to be corrected else rupee will be terribly over valued and that would impact the exports.
    So the solution to the problem lies more in terms of improving our efficiencies in general and be able to produce and sell goods in the international market at competitive rates reducing the current account deficit.

    Like (1)

    monish gaur

    Jun 27, 2013

    1. I, Baba as my followers address me with reverence beg to differ from your article, rather drastically.
    The fall in rupee was apparent to economic pundits, a huge finance ministry, RBI, a planning commission, the whole team of economic advisors, majority of whom are on a second or third innings, et all. Yet, they failed, and in this June like the traumatic deluge in Uttarakhand, the rupee got washed away. Wonder what is the long winding and confusing prognosis of Lata on CNBC TV18.
    2. It does not make travel costly, but cheaper as there will be more passengers in domestic circuit, as a sizeable majority will not be allowed free travel and perks on bahi khattha (country or company accounts) . However, Indians with second and third generation abroad will always be welcomed to do aayah duties by the working second generation, generally the bill being footed ex India by the progeny, but in dollars.
    3. More foreigners will come; resultantly tourism, hotels, reality, yoga, cheap and perhaps better medicare will prosper. As these junkies like isolated location, remote areas will see development.
    4. Baba, how did this fall happen. Baba replies, the moot reason is lack of energy , not physical energy in which India has shown its prowess by becoming almost number one as the most populous country. It is the lack of chemical and not physical energy, though reserves for chemical energy in terms of coal, gas, oil are adequate. Then, what is the hassle, baba ? Baccha, problem is who will get the contracts. So again technology will come and at a premium in dollars, though we will buy coal fields in Africa and Australia.
    5. Baba, is this 8 percent cess on Gold valid for a democracy ? Baba is perplexed as he wears a kilogram of different Gold jewels every day. His logic is different from the FM. So he starts with the simple denial that a government which denies all its people, we Indians to buy Gold at par with world rates, given the steep dollar, though continuing to allow Indian multi billionaires free access to purchase companies at a market premium as done in the past by TATAs in Corus :Tata steel, JLR : Tata Motors, telecom in Africa : Airtel, an endless list which continues with the Apollo tyres, et all, without even a decimal plus figure as foreign acquisition cess is discriminatory.
    6. Baba ponders over the different stance of government on policies for average and billionaire Indians. He curtly tells his disciples to maintain dignity of the gathering place and assuages them that with pre scheduled elections to be held in all probability, the policy will also see a flip flap, characterizing the ruling party. Perhaps a gram of Gold for each vote will truly reflect the value of governance in terms of market capitalization of an economy mired in deep corruption. Baba, likes Gold like most Indians and he devoutly smokes it too, in Charminar Gold cigarette packs which he chain smokes. To negate the harmful affects of smoking, thrice a day, Baba eats Sona Chandi Chavanprash. Being a Gold lover, Baba says, Gold is better than dollar. Bernanke is teaching the world, how to be an American, ie.. to learn to appreciate the dollar and not Gold. Baba further asserts, given the loans in dollar terms on USA, liquidation of these loans will imply not only drastic fall of dollar, besides all commodities, but also the transformation of USA to usa.
    7. Rise of dollar valuations does not affect average Indians, it affects the leveraged companies. Dollar inflow has to increase. So RBI must decrease interest rates and allow rupee to fall till 65, thereby increasing FDI, FII and NRI to prosper and reckon India as a policy amenable nation.
    8. However, governance will take a hit, due to rise in dollar value. Why ? How ? Baba’s logic is simple, he calms down the noise from ruling party and asks them the simple question that will IT companies including Infy’s new chairman focus more on dollar earnings from abroad or not. The ruling party spokesperson asserts in replying the no-brainer, Obviously YES he says and reasserts, the increased earnings of IT companies will enhance profits and keep a check on dollar, but Baba tell me how will this affect governance. Baba, having recently returned from foreign sojourns in the Boeing Jet of his disciple, tells the followers, “ Absolute power corrupts, does it not”. His ardent disciples shout out the Aayes, drowning the spokesperson’s No. Sensing the spokesperson’s predicament Baba asks her, “does IT usher in transparency” ? “Yes off course”, she candidly replies, without thinking, contrary to teachings of party high command. Baba jumps at her answer and asks the crowd of his followers, “ so bhakt jann will dollar earnings reduce focus of IT companies on domestic Indian markets “ ? The Aayes have it, prompting Baba to justify his statement that governance will take a hit, perhaps bigger than before resulting in new scams which though of same figures more or less will be now in dollar terms. Continued lack of IT in governance in India will reduce transparency resulting in scams in dollars, though dollar earnings of these IT firms will help stabilize the rupee.
    Hope some of you guys appreciate the pun, this is not a serious reply, enjoy it over a drink with a pinch of salt.

    Like (1)


    Jun 27, 2013

    The points put orth is 100% correct.The government action is expected but it is a dream only.

    Like (1)

    k j joisa

    Jun 27, 2013

    If the rupee depreciates and makes imported things costly, it is O K , as it will save Indian jobs, manufacturing sector, restrict import of cheaper materials from neighbouring countries like sugsr from Pak, low quality materials from China, mobiles , T V etc from abroad.Let them build the industries in India instead of importing knocked down Benz cars. It will make our exports competitive. We need not cry for travellers abroad as they can afford it being the creamy layer

    Like (1)


    Jun 27, 2013

    Government of India (Finance Minister or P.M.) are at present busy in publicity stunts.They want to create a picture of their achievements in last nine odd years in power,which is totally false & misleading.Big advertisements in most of leading dailies,without any concrete achievement.
    Desparity is widening (Between Rich & poor) All Central & State Ministers are busy in their own reaserch - How to secure & win next elections. Who is bothered about fall of Rupee ? Common man will have to suffer the consequences, ministers are elite class & will hardly suffer from inflation,poverty,malnutrition & so on. Only that God can save us from anarchy in future.

    Like (1)


    Jun 27, 2013

    Under the ageis of Doctorate PM the irresponsibility became an asset and responsibility became an liability. This invention is sufficient to awadr Nobel prize for the PM

    Like (1)


    Jun 27, 2013

    Well i do agree the fall in Rupee will affect a stronger currency is always good for a nation in terms of pride and self esteem.
    But looking slightly deeper i am not able to understand the current dynamics of food and grocery prices at the retail level.I dont know if any of the elected representatives have gone to the vegetable market lately...across the board there has been a price increase of atleast 50% (I repeat 50%) and this in spite of a so far good and timely monsoon.Would want to know what exactly is happening out there.....Are we really missing the trees for the woods......

    Like (1)
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