Wednesday, 16 May 2012

Impact on fall of rupee against dollar

For individuals, foreign travel gets expensive to the extent of the rupee fall. Overseas education, electronic items, goods and services imported are all expensive. In case of companies, borrowing costs surge if there is no currency cover.

In general, it is bad news for importers and good news for exports.
For a company like Kingfisher Airlines, which is already in much trouble, it can however prove beneficiary since it has a fair amount of bank holdings in the US & UK.
Throughout the weeks of rising prices and weakening rupee, the share market has been hurt the most, since the foreign investor tend to keep a distance from the Indian stocks keeping in mind the overall deficit that the country is in right now (which is one of the most fueling reasons for the decline in the value of rupee).
For a country like India that imports 70 per cent of its fuel it would translate into a fatter import bill for oil companies and would add to their losses.

If rupee continues to slide, then oil companies may be forced to hike petrol prices again to compensate for their losses. This, along with the rising inflation rates, is sure to add to the worries of the Indian Government, since a weaker currency also fuels inflation.

India is not an export-oriented nation like Taiwan, Korea or China. Exports account for about 20 per cent of GDP while in China, exports contribute 35 per cent.

The central bank can intervene to arrest the slide. Analysts have criticized the hands off policy of the central bank. Rajeev Malik, senior economist at CLSA argued that RBI is talking too much about not intervening in the currency market. “In RBI's case on rupee it is almost like it is an advertisement to the rest of the world that look 'if you want to short currency come to India'. I don’t know of any central bank that would openly go on saying that look we will not intervene, at a time when globally things are so uncertain,” he said.

“The inflation gets hurt a little bit but our imports would be restrained and exports would be encouraged because of the fall in the rupee,” said Rajiv Kumar, secretary general of FICCI.

The global uncertainty has meant a lot of volatility in currency markets but the rupee's fall has been dramatic. Market was abuzz with speculation that the Reserve Bank has probably asked public sector banks to release dollar to arrest the fall in rupee, so it remains to be seen what will happen to rupee in the coming days.

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