Why is the falling rupee a matter of concern?

Since India is a net importer of commodities, especially crude oil, a fall in the rupee would mean a wider trade deficit and a current account deficit. In such a situation, the Reserve Bank of India (RBI) has announced measures to prevent the fall of the rupee. But even though the rupee is slowly gaining its footing, a meaningful appreciation is still far away. The Indian unit closed at 79.27/$ on Friday.

Sugandha Sachdeva, Vice President Sugandha Sachdeva said, “US Dollar index is on top, the latest comment from US Federal Reserve was not very bullish and RBI’s intervention, all in all, we see the rupee at 78.50/$ level by the end of August. Huh.” President, Commodity and Currency Research, Religare Broking Ltd. However, downside risk to this forecast could arise from the rise in crude oil prices and a rebound in the dollar index. “In that scenario, 81/$ cannot be ruled out going forward in FY23,” he added.

So far, in CY22, the Indian currency is down 6.6% against the USD. Some Asian currencies have seen a sharp fall against the rupee, but there has not been much relief. This is because corporate earnings estimates were already under severe pressure due to input cost inflation, and the risk of a downgrade will become more pronounced if the rupee remains weak.

Companies in sectors such as consumer discretionary and materials have a greater dependence on imports. BofA Securities anticipates companies that have large foreign currency liabilities to report significant mark-to-market losses.

This comes at a time when demand is not particularly bright. “Except in select segments like Auto, AC (Seasonal Impact), Management’s comments/anecdotes slowed down the demand outlook,” said a report dated July 22 by BofA Securities.

Given this, how well Indian companies deal with this pressure will largely depend on their ability to tide over the cost burden on account of rupee depreciation. Deepak Jasani, Head of Retail Research, HDFC Securities Ltd, said, “It is too early to say what kind of impact the rupee depreciation will have on the consensus earnings estimates as importers may suffer, exporters will benefit from a weaker rupee.” “If the depreciation of the rupee keeps the cost of electricity and fuel going up and the economic momentum picks up, companies will have to bear that cost, and that could affect the overall earnings estimates,” Jasani said.

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