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Home / Markets / Mark To Market /  Why the falling rupee remains a worry

A depreciating rupee is a double-whammy for India. Repercussions of the currency weakness are felt at both macro and micro levels. Around mid-July, the rupee breached 80/$ during the day, for the first time ever.

Since India is a net importer of commodities, especially crude oil, a falling rupee would mean a wider trade deficit and a worsening current account deficit. As such, the Reserve Bank of India (RBI) has announced measures to curb the rupee’s fall. But even though the rupee is slowly finding its feet, a meaningful appreciation is still away. On Friday, the Indian unit closed at 79.27/$.

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“The US dollar index is topping out, the latest commentary by the US Federal Reserve was not too hawkish and RBI intervention, all put together, we see rupee at 78.50/$ level by the end of August," said Sugandha Sachdeva, vice-president, commodity and currency research, Religare Broking Ltd. However, downside risks to this forecast could emanate from crude oil price rising and the dollar index rebounding. “In that scenario, 81/$ cannot be ruled out going ahead in FY23," she added.

So far, in CY22, the Indian currency has fallen by 6.6% against the USD. Some Asian currencies have seen a steeper fall than the rupee, but that does not offer much solace. This is because corporate earnings estimates were already under severe pressure due to input cost inflation, and the risk of downgrades would get more pronounced if the rupee remains on a weak footing.

Companies in sectors such as consumer discretionary and materials, among others, have higher dependence on imports. BofA Securities anticipates companies that have large foreign exchange liabilities to report significant mark-to-market losses.

This comes at a time when demand isn’t particularly bright. “Barring select segments like autos, ACs (seasonal effects), management comments/ anecdotes point to slowing demand outlook," said a BofA Securities report dated 22 July.

Given this, how well Indian firms cope with this pressure would largely depend on their ability to pass on the cost burden due to rupee depreciation. “It is too early to quantify what kind of impact the rupee’s depreciation will have on consensus earnings estimates because while importers may suffer, exporters will benefit from a weaker rupee," said Deepak Jasani, head of retail research, HDFC Securities Ltd. That said, if power and fuel costs remain elevated due to a falling rupee and economic momentum fizzles out, then companies will have to bear that cost, and that could weigh on overall earnings outlook, Jasani added.

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