How will the rupee's fall affect you? : Global Organisation for Pravasis Urakam (GOPUR)

Published On: Monday, May 21, 2012

How will the rupee's fall affect you?

The Indian rupee seems to be fighting a prolonged battle. Given the high trade deficit, drying up of capital flow, and fears over the stability of Eurozone, the rupee is getting weaker by the day. On 17 May, it hit an all-time low and plunged below the Rs 54/$ level to 54.57. The situation is unlikely to change for a while. Nitin Rakesh, CEO, Motilal Oswal AMC, suggests that Indians should get used to this 'new normal' for the rupee.

"The rupee is likely to continue to remain in the mid-50s, and become the new normal for some time to come," he says. This sharp decline of the rupee from Rs44/$ to Rs 54/$ spells trouble for you for a variety of reasons, and may even require you to revisit your budget plans for the year. Everything, from your investments to spending and savings, will have to be reviewed to prevent your finances from falling into a disarray. We list out the areas in which you are likely to feel the pinch and those from which you could benefit.

Where it hurts

Investments (importers, foreign currency borrowers)

For stock market investors, the weakening rupee hurts on several fronts. The companies with significant foreign currency borrowings, or those which import raw material from abroad, have already taken a hit. These firms are now shelling out more rupees to repay every dollar borrowed and spending more rupees on imported raw material.

This is eroding their profitability. The impact has been clear in the company's financials right from the September 2011 quarter earnings, through the December 2011 and March 2012 quarter results, and will continue to reflect in the June earnings as well.

India Inc's profitability has been significantly affected due to the mark-to-market hit taken on foreign currency exposure. The weakness in the rupee may further dampen the FII sentiment, which has already been impacted due to policy inaction and macro troubles. This is because the value of their investments (in dollar terms) is eroding, which may prompt them to pull out more money from the markets.

Foreign travel

If you have been postponing your foreign trip till the rupee returns to comfortable levels, you may have to delay your plans. With every fall in the rupee, travelling abroad becomes more expensive as one has to fork out more in rupee terms for every dollar spent.

Already, foreign tour operators have jacked up the prices for their tour packages and may revise them further. You may also have to spend more on your travel insurance. Even if you have booked the foreign tour package in advance, you may need to furnish the differential amount to the extent of the rupee slide. If you are still keen on vacationing abroad, make sure you carry enough spare cash to cover the inflated expenditure.

Imported goods and fuel

Your desire to own the latest electronic gadget may cost you more than you budgeted for. Since most imported goods are billed in dollars, Indian consumers are likely to see the prices inch up further. The prices of all imported white goods, such as refrigerators, microwaves, mobile phones, and laptops, are likely to witness a spike in the near term.

Dharmakirti Joshi, chief economist at Crisil, says, "The sharp rise in cost of imports is bound to be reflected in the prices of all such goods." Also, the companies that import raw material in large quantities will be forced to hike prices for the end consumer. This means that cars and two-wheeler manufacturers could realign their prices.

The area where consumers are likely to be hit worst is the spike in fuel prices. With the declining rupee, the crude oil import bill for the government has also gone up, forcing it to jack up petrol prices. A further fall in the rupee may lead to more hikes. Consequently, the prices of most food items will also witness a rise as the cost of transportation jacks up.

Foreign education

The pain for parents of Indian students studying for their foreign degrees will not go away. They will have to continue shelling out more to fulfil their child's dreams. Given the sharp decline in the rupee, they will have to incur a higher expenditure in rupee terms to cover their tuition fees, food, stay and other living expenses. This will add to the high cost of overseas education.

SP Dhanapal, Sudha NRI Consultants, says, "The students going abroad for education will have to factor in a 10-15% rise in cost." Those taking an education loan to pay for the foreign education will have to bear a higher burden as the loan requirement will shoot up to that extent. Some may be forced to take a top-up on existing loans, which means that they will have to pay back that much more. Some parents may even have to dip into their personal savings to fund the shortfall.

Where you benefit

Some people stand to benefit from the massive slide in the rupee. Among these are families of NRIs, exporters, investors in gold and international funds.

Foreign currency remittances

The families of people who are working abroad stand to gain a lot. The non-resident Indians who are remitting money back home are effectively putting more money into their wallets as they will get more rupees for every dollar. So, a family receiving a remittance of $5,000 per month will now get Rs 2.70 lakh at Rs54/$, instead of Rs 2.25 lakh at Rs45/$ earlier. Dhanapal says the rupee slide will bring cheer to nearly 2 crore NRI families. "Bulk remittances will witness a rise as NRIs take advantage of the rupee-dollar movement," he adds.

Investments (exporters, gold, global funds)

Not all is gloom and doom in the investment space. Within the stock universe, export-oriented companies and those with significant foreign currency revenues will benefit from the rupee decline. This is because they will earn more rupees for every dollar worth of goods sold or assets held.

As such, the earnings of IT services firms and textiles manufacturers will get a boost. However, the exporters who have already hedged their receivables at lower levels will not benefit much. Domestic gold prices are likely to gain; if gold is already a part of your portfolio, you will benefit if rupee slides further.

The individuals invested in global funds have already seen a surge in returns even if the NAV has not risen much. This is because their performance in rupee terms has been multiplied to the extent of the fall.

News Source, credit and thanks : The Economic Times.

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Posted on Monday, May 21, 2012. Labelled under , . Feel free to leave a response

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