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Whom does the rupee hurt? - Views on News from Equitymaster
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  • May 18, 2007

    Whom does the rupee hurt?

    Even though the Reserve Bank of India (RBI) has been 'concerned' about the appreciation of the rupee and the widening trade deficit, it has been forced to let the currency move upwards, as excessive intervention in the forex market would result in a large injection of liquidity into the banking system, something that the central bank has been aggressively working against.

    A couple of years back, when the domestic industrial capacity utilisation was low, the system could absorb this liquidity. With capacity utilisation increasing to near-peak levels, this liquidity has, over the last few months, posed a challenge to the RBI's target inflation levels. To control this overheating, the RBI has been forced to sterilize this excess liquidity via reverse repo (until recently), market stabilisation scheme (MSS) bonds and CRR hikes.

    Collateral damage on export growth
    The rupee appreciation against the dollar has, however, been an added challenge for the country's export growth trend. This trend would only cause further widening in the current account deficit (excluding remittances). Speaking of sectors per se, the performance of sectors like software, textile and pharma on the bourses in the last few sessions speaks volumes of the negative anticipation of the sectors' performance in the coming months. Sectors like hotels that receive revenues in US dollars and those that have sales linked to international parity prices will also be hurt by the fall in dollar.

    The losers...
    Sectors Impact
    Grasim Industries VSF (19% of revenues) trades on international parity prices
    Capital goods
    Suzlon Exports account for 48% of revenues
    Indian Hotels 55% of revenues are in US$
    Hotel Leela 65% of revenues are in US$
    Cipla 51% of revenues are from exports
    Ranbaxy 81% of revenues are from exports
    Dr Reddy's 80% of revenues are from exports
    Infosys 63% of invoices are in US$
    TCS 55% of invoices are in US$
    Satyam 65% of invoices are in US$
    Arvind Mills, Alok Ind Exports form 50% of sales
    Gokaldas Exports Exports form 100% of sales, 50% of raw materials imported
    Source: Equitymaster research

    Nevertheless, investors need to note that companies that have dollar denominated borrowings will find it easier to repay them and book profits. Also, those with input costs linked to international parity prices will evade any negative impact on their margins.

    The gainers...
    Sectors Impact
    Tata Motors Gains on US$ 500 m FCCBs, lower metal prices to offset export losses
    Capital goods
    L&T Gains on FCCBs of US$ 135 m
    HLL More than 50% of the raw materials are linked to international $ rates
    Oil & Gas
    HPCL, BPCL, IOC Losses on refining margins are offset by lower retail marketing losses
    NTPC, Rel Energy Profit on translation of foreign exchange liabilities
    Bharti Airtel Gains on dollar denominated forex borrowing
    Reliance Comm Gains on dollar denominated forex borrowing
    Jet Airways Gians due to lower fuel (ATF) costs
    Source: Equitymaster research

    Capital controls next?
    Currently, the RBI appears to be focused more on slowing domestic demand growth and reducing inflationary pressure. Fighting the impossible trinity, the RBI has so far chosen to let the currency appreciate and has tried to achieve greater effectiveness in management of monetary policy. However, after the recent sharp rupee appreciation, the medium-term implications of an overvalued currency on macro economic stability (impact on current account deficit) may force the RBI to start intervening. Having done that, if the pressure of capital inflows continues to persist, the RBI may have little choice but to initiate some capital controls, an issue that it has been lamenting on for quite some time now.



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