The rupee to USD exchange rate plays a crucial role in India’s trade deficit and overall economy. A weaker rupee increases the cost of importing goods and services, widening the trade deficit, as more currency is needed to pay for imports. This affects sectors reliant on foreign raw materials or technology.
Conversely, a stronger rupee can reduce import costs but may hurt exports by making Indian goods more expensive for foreign buyers. The exchange rate also impacts inflation, foreign investment, and the country’s debt servicing. Therefore, fluctuations in the rupee/USD rate significantly influence India’s economic stability and trade balance.
The fall in the Indian Rupee (INR) can be attributed to several key factors:
- Constant Selling by FIIs (Foreign Institutional Investors): Continued selling of Indian equities by FIIs leads to increased outflows of foreign capital, putting downward pressure on the rupee as they convert their funds to dollars, thus increasing the supply of INR in the international market which in turn continues to push the prices downward.
- Fear of Trade Tariffs by the US: The threat of trade tariffs by the US on other currencies can trigger a flight to safety, with investors preferring the US dollar, further weakening the INR.
- Delay in Repo Rate Cuts: The Federal Reserve and Reserve Bank of India (RBI) have delayed repo rate cuts, to counter inflationary pressures this has resulted in the USD becoming stronger. As inflation continues to exceed desired levels, investor confidence weakens, leading to higher investment in the US Government Securities thus leading to a greater outflow of money from the Indian markets which is further impacting the Indian rupee.
- Geopolitical Instability: Geopolitical tensions globally drive investors towards the US dollar, a safe-haven currency. As the dollar strengthens, the rupee depreciates, reflecting its inverse relationship with the greenback in global trade.
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Sectors that will be affected are:
IT Sector
The falling rupee benefits leading Indian IT companies like Tata Consultancy Services (TCS), Infosys, and Wipro, as they earn a substantial portion of their revenue in dollars. This boosts their profitability and earnings per share. However, higher import costs for tools and software may offset some of the gains.
Pharma Sector
Key players like Sun Pharmaceutical, Dr. Reddy’s, and Cipla face increased costs for importing APIs, primarily from China as the INR continues to fall. This raises production costs, which can squeeze margins and result in higher prices for end consumers.
Oil Sector
Major oil importers like Indian Oil Corporation (IOC), Bharat Petroleum (BPCL), and Reliance Industries bear the brunt of a weaker rupee, as crude oil prices are dollar-denominated. This increases their operating costs, impacting profitability.
EMS Sector
Companies like Dixon Technologies, Sterlite Technologies, and Amber Enterprises are hit by rising import costs of electronic components due to the falling rupee, affecting margins and making cost management more challenging in their highly competitive sector.
Conclusion
The declining Indian rupee presents a complex economic scenario with varied sectoral impacts. While IT companies benefit from dollar-denominated revenues, pharmaceutical giants face increased API import costs. Oil sector companies endure higher operational expenses due to dollar-denominated crude purchases, and EMS companies struggle with costlier electronic components.
The rupee’s weakness stems from multiple factors, including persistent FII selling, delayed repo rate adjustments, and global geopolitical tensions. This currency depreciation significantly influences India’s trade deficit, inflation, and overall economic stability, requiring careful monitoring and strategic responses from both businesses and policymakers.
Written By: Dipangshu Kundu
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