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How does a weak Indian Rupee affect the Indian economy?

Put yourself in the place of Trump and observe your economy.

Your local US manufacturer can make computers for $900 each however his competitor in China producing same product for $800. For the stability of your economy what would you do? will you import the same product for $800 and sell them at $850 and let your local suppliers shut the door of their business? NO

Instead you may impose tariffs to raise revenue or to protect domestic industries from foreign competition. So you imposed 25% Tariffs on computer imports.

So by making foreign-produced goods more expensive, you made domestic-produced ones more attractive and protected jobs. Imposing tariffs on a trading partner's main exports is a way to exert economic leverage.

When Trump recently announced Trade Tariffs on Chinese goods then everybody rushed to oppose his decision because investors were worried about a Trade War which eventually will affect both the economies so the global economy but has anybody tried to find why Trump imposed Tariffs?

Come back to India, Whenever we talk about currency and its valuation we actually more concerned about Imports and Exports.

If a country has:

More exports means more output from factories and industrial facilities, as well as a greater number of people employed to keep these factories running. The receipt of export proceeds also represents more inflow of funds into the country, which stimulates consumer spending and contributes to economic growth.

Conversely, If a country has:

More imports are considered to be a drag on the economy, as can be gauged from the GDP equation. Imports represent an outflow of funds from a country since they are payments made by local companies (the importers) to overseas entities (the exporters).

While all those terms are important in the context of an economy, let’s look closer at the term (X – M), which represents exports minus imports, or net exports.

  • If exports exceed imports, the net exports figure would be positive, indicating that the nation has a trade surplus.

  • If exports are less than imports, the net exports figure would be negative, indicating that the nation has a trade deficit.

India is NET IMPORTER

Can you imagine India's current account deficit widened sharply to USD 13.0 billion in the fourth quarter of 2017-18, or 1.9 percent of GDP, from USD 2.6 billion, or 0.4 percent of GDP, in the same period of the previous fiscal year.

(The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.)

Now if you understand what I just discussed then it would be very easy for you to analyse the reasons How weak Indian Rupee affect the Indian economy.

Number 1) It keeps the cost of oil imports relatively high.

Trade war triggered the Brent Crude price and India imports more than 70% of its crude oil requirements. While Brent crude slipped to around $77.58 per barrel. Yet, if the currency continues to depreciate, there's a high chance that India will not benefit because it will still have to pay more in local currency per barrel of crude oil, keeping our oil import bill high

Effect : Companys like BPCL, HPCL, had a worst hit as they import Brent Crude.

Number 2) Current Account Deficit:

FIIs hold major stake in BSE-500 companies they already nervous about India's high current account deficit, or CAD and this triggered Worst Foreign Fund Outflow In A Decade.

The reason is that foreign investors were already edgy about India's finances, especially the large CAD, and took flight at the slightest hint of better opportunity abroad. Countries with huge deficits are usually the worst off in currency sell-offs.

Number 3) SENSEX-RUPEE correlation :

The data of the past 10 years shows that both the Sensex and the rupee movements share a strong positive correlation: When markets go up, the rupee appreciates, and vice-versa. There is a correlation of 0.44 between the two. It means, 44% of the movements in the Sensex in the past 10 years can be linked with the movements in the rupee and vice versa.

Image: ET

The Sensex and the rupee are directly and indirectly affected by several similar factors, including the outlook for the Indian economy, governance, trade deficit/surplus, foreign institutional investors’ (FII) inflows and outflows, forex reserves, monetary policies undertaken by governments across the globe, among others.

Number 4) Pressure on Corporate Margins:

A declining rupee adds to the pressure on corporate margins through higher imported input costs. Higher local prices also add to costs. According to a recent report, gross margins of companies are at decade lows, mainly driven by higher raw material costs and stiffer competition. Cooling global commodity prices might not afford much relief because the cost of imported raw materials will still be relatively high in rupee terms.

Ex- Aviation Industry.

For aviation Industry major raw material is oil or fuel and as India is a net importer of oil so India's oil imports in 2017 surged to a record 4.4 million barrel per day. These companies also have to compete in terms of charges also so they can’t even charge beyond a certain level so this door is closed. They don’t have any choice but to become dependent on Crude price.

Higher Crude > Weak currency > higher COGS > Less Profit

Today Indian rupee fell to a lifetime low in trade as a confluence of factors ranging from a stronger dollar, to higher oil prices, a wider current account deficit and foreign portfolio outflows pushed the currency lower. The rupee fell to 69.09 in intraday trade.

Akshay Seth Research Analyst ( SEBI Regd.) invest@equityboxx.com

https://www.linkedin.com/in/akshay-seth-1b7a1668/

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