For sectors where the country is heavily import-dependent, a weaker rupee would inflate costs further. But the worries are abated, at least for the time being, by the current benign domestic inflation and relatively low commodity prices.
The adverse effect of falling rupee will be felt across traders and companies that import/process crude oil and natural gas (LNG), edible oils and fertilisers. Weak local currency could jack up imported-inputs costs of fast-moving consumer goods (FMCG) firms. The aviation sector is also vulnerable given that its key cost components are denominated in dollars, which have turned more expensive.
With the central bank’s policy to interfere much less in the forex market than it used to, some of the large-import sectors like edible oils and coal have a pressing case for reducing import reliance over the medium term. Policies are being implemented to spur domestic edible oil production and coal mining, and these have already begun to bear fruit. For crude oil and natural gas, however, import volumes will continue to be high, as prospects of higher domestic production are limited.
Impact on end consumer
The impact on the end consumers will be limited/calibrated as the cost increases will be shared by the government budget and to a certain extent by state-run oil firms. Retail prices of fertilisers are controlled and auto fuel pricing is not totally free in practical terms.
Prices of petchem and polymers for Indian consumers will rise as these crude derivatives are priced on import-parity basis. “Import bills for both oil and gas will be impacted as these are essentially dollarised businesses. Crude import bill will go up in rupee terms. Since prices are fixed for petrol and diesel at the pump level, there would be an impact of rupee depreciation,” said Prashant Vasisht, senior vice president at ICRA.
Impact of rupee’s fall on domestic producers
For domestic crude oil producers like ONGC and Oil India, the rupee’s fall is, however, positive thanks to import-parity pricing. The downstream industries, which consist of refiners and marketers, may feel the pinch. Reliance Industries and state-run IOC, BPCL and HPCL would, however, be able to offset the negative effect to the extent gross refining margins are dollar-denominated. One positive aspect for marketers of auto fuels is that marketing margins are now very healthy.
City-gas companies like IGL and MGL will see their costs going up. “In the LNG segment, the increase in import bill may be passed on to consumers also, at least with a lag if not immediately and there will be some compression on margins,” Vasisht said.
While retail petrol and diesel prices may not go up immediately due to absorption of the under-recoveries by the state-run oil marketing companies, the prices of oil and oil derivatives along with that of other imported commodities will increase for the industrial sector, increasing input costs and wholesale inflation. Some petrochemical players buy naphtha and other material from foreign markets where again there could be an impact on their cost in rupee terms because of dollar denominated purchases.
FMCG companies such as Hindustan Unilever and ITC could face 5-7% rise in input costs as palm and crude derivatives account for 20-30% of their total raw material costs. Of course, the prices of palm oil, a major ingredient in FMCG products, have been stable for the last six months, creating a cushion.
A report by Goldman Sachs last month indicated that HUL was significantly impacted by the declining value of the rupee, with 55% of its raw material prices being tied to international commodity prices, 25% of which being imported and 30% linked to global prices. Exports constitute only 15.5% of HUL’s revenues. Analysts believe that a prolonged decline in the rupee could result in a rise in HUL’s input costs by 6-8%, which may affect profit margins for 2025-26.
According to Pushan Sharma, director-research at Crisil Market Intelligence and Analytics, rupee fall coupled with crude price rise is expected to increase input costs. Preeyam Tolia, senior research analyst at Axis Securities expects a falling rupee to have an impact on the operating margins of firms like HUL, ITC, Godrej Consumer, Dabur India, Marico and Wipro Consumer. Tolia of Axis Securities, however, expects margins to improve sequentially in the third quarter and any impact to be short-term.
Apart from rising input costs, increasing international acquisitions are also exposing FMCG companies to currency risks, as many firms have financed acquisitions through foreign currency loans.
To combat the impact of falling rupee, FMCG firms are targeting higher exports to the US and European markets, especially for tea, coffee, spices, and processed foods.
Key aviation costs like aircraft leases, maintenance contracts, engine overhauls, spares, and even fuel in global markets, are denominated in dollars, and may flare up. Unlike the auto sector, aviation has almost no export component to offset these dollar-linked expenses. This is why airlines such as IndiGo have reported losses in the past primarily due to foreign-exchange exposure, even when passenger traffic and revenues were strong. When the rupee weakens, lease rentals and maintenance bills surge in rupee terms, directly hitting profitability.
India imports nearly 30% of fertilizers consumed – urea, DAP, potash, and NPK. A senior official with a fertilizer company said the rupee fall could push the cost of imports from February onwards as companies have hedged exchange rates till January. “Cost of imports is largely dependent on the global fertiliser prices (rather than exchange rate) which often see volatility due to transportation routes impacted by the geo-political factors,” an official told FE. Cheaper rupee may push fertilizer subsidies in the February-March of the current fiscal from Rs 1.85 lakh crore budgeted for the current year.
Imports of edible oils – palm, soybean and sunflower – from Malaysia, Indonesia, Russia, Ukraine and Argentina could get costlier. India imports about 58% of its cooking oil consumption.
