A fall in the value of the Indian rupee vs the US dollar has a cascading impact that is not restricted just to the super-rich or exporters and importers. Over time, the depreciation will hit the common man in a number of ways - costs, pay, jobs.
For a country like India, which imports more goods and services that it can export out, a depreciating currency means higher prices of a number of daily consumption products. Thatís a double whammy to the man on the street, who has already been reeling under the impact of double-digit consumer-level inflation for the last three years. A weak rupee means costlier crude oil, pulses, edible oil, fertiliser, medicine, iron ore and coal, all of which India imports in substantial quantities. Though not all of these are daily consumption items, variations in their prices have an indirect effect on household finances.
Take, for example, crude oil. A weak rupee will lead to higher import prices. Since petrol is fully and diesel partialy decontrolled, oil marketing companies such as IOC and BPCL are free to hike their retail prices in tandem with the import-linked prices. Once the prices of both fuels increase progressively at the filling stations, it is followed by a cascading impact that is manifested in the form of an increase in transportation costs, leading to higher prices of goods that are transported from one part of the country to another, such as food, consumer durables and fast-moving consumer goods.
Among the sectors that would potentially take the biggest hit is automobiles, one of Indiaís largest manufacturing segments and a big employer. The impact of the falling rupee is likely to be three-pronged. As most automobile companies import components, they will have to hike costs of two-wheelers and cars. Some of these companies, including all those foreign-owned, will have to pay a higher royalty to parent firms. A pressure on margins could also mean firms being forced to cut down production, implying salary cuts and possible retrenchment.
Manufacturers of consumer goods such as soaps, detergents and shampoos, where vegetable oil is a key ingredient, would need to hike prices as input price trends upwards. India imports about 60 per cent of its edible oil requirement; crude palm oil, whose prices generally set the pace for other edible oils, forms a big chunk of it. Pulses, too, account for a substantial chunk of Indiaís imports, and a weaker rupee will mean the prices of lentils in the market go upward. Electronic consumer goods such as computers, high-end TV sets and mobiles, which have imported components, are likely to be dearer.
Coal & other inputs
For a number of sectors, such as capital goods manufacturers, makers of industrial intermediaries such as tyre cords, and newspaper offices ó all of which depend on imports for inputs such as components and newsprint ó a falling rupee may force a tightening of costs elsewhere, including possible pay cuts and retrenchment. For sectors such as hospitality, where the cost of services is benchmarked to international levels, a depreciating currency means a lower discretionary spend by potential customers, forcing hoteliers into cost cuts.
Apart from oil and gas, Indiaís import list includes an increasing amount of thermal coal, used for generation of electricity. A falling rupee increases costs for power generating units, which would pass these on to distribution utilities, finally leading to higher electricity bills for consumers at large.
For a number of firms in the manufacturing sector that had gone in for foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds, a higher value of the rupee progressively escalates the repayment costs. This too would squeeze the margins of these firms, which could respond by laying off manpower or with salary cuts.
For industries that earn in dollars, such as the IT sector, an appreciating dollar would mean greater earnings from its overseas businesses. Families of NRIs remitting money from a foreign country to India will get more rupees as repatriation goes up.