It has the potential to trigger FII outflows
The rupee has depreciated by as much as 30% against the US dollar since the beginning of the current fiscal. A confluence of factors such as increase in FII outflows from the domestic equity market, a strengthening dollar, waning exports and weakening domestic economy have weighed down the value of the rupee.
Although the rupee value will remain depressed against the dollar, it is likely to stabilise around 49 against the US dollar in the near term as the heightened risk aversion of FIIs subsides and the RBI intervenes to rein in the rupee value.
The depreciating rupee is likely to add to the woes of Indian firms with significant levels of foreign currency-denominated, especially dollar-denominated loans. Increase in interest payment and principal obligations might lead to forex losses for companies with dollar loans. As per latest data, India had an external debt of $221.3 billion at the end of June 2008.
The adverse impact of the recent depreciation in the rupee is likely to be felt more so on the shortterm debt, which accounts for around 20% of India’s total external debt. A steep depreciation in the rupee has the potential to trigger FII outflows and is likely to dissuade NRI as well as FII investors from parking funds in India, as potential returns earned will be adversely affected. In fact, according to the latest available data, NRI deposits declined by as much as $1.1 billion to $42.6 billion as at end-June 2008 as compared to end-March 2008 level.
The RBI’s intervention in the forex market to support the depreciating rupee during the last few months has in part led to a decline in India’s foreign exchange reserves. India’s foreign exchange reserves have declined by $62.35 billion to $249.53 billion as on February 20, 2008 (from $311.88 billion as on April 4, 2008).
Depleting foreign exchange reserves is another cause for concern, as the available import cover is lowered, along with an adverse impact on India’s foreign debt sustainability. The depreciating rupee will do little to increase India’s exports, given similar depreciation in the currencies of India’s competitors and the global slowdown in demand.
The rupee has depreciated by as much as 30% against the US dollar since the beginning of the current fiscal. A confluence of factors such as increase in FII outflows from the domestic equity market, a strengthening dollar, waning exports and weakening domestic economy have weighed down the value of the rupee.
Although the rupee value will remain depressed against the dollar, it is likely to stabilise around 49 against the US dollar in the near term as the heightened risk aversion of FIIs subsides and the RBI intervenes to rein in the rupee value.
The depreciating rupee is likely to add to the woes of Indian firms with significant levels of foreign currency-denominated, especially dollar-denominated loans. Increase in interest payment and principal obligations might lead to forex losses for companies with dollar loans. As per latest data, India had an external debt of $221.3 billion at the end of June 2008.
The adverse impact of the recent depreciation in the rupee is likely to be felt more so on the shortterm debt, which accounts for around 20% of India’s total external debt. A steep depreciation in the rupee has the potential to trigger FII outflows and is likely to dissuade NRI as well as FII investors from parking funds in India, as potential returns earned will be adversely affected. In fact, according to the latest available data, NRI deposits declined by as much as $1.1 billion to $42.6 billion as at end-June 2008 as compared to end-March 2008 level.
The RBI’s intervention in the forex market to support the depreciating rupee during the last few months has in part led to a decline in India’s foreign exchange reserves. India’s foreign exchange reserves have declined by $62.35 billion to $249.53 billion as on February 20, 2008 (from $311.88 billion as on April 4, 2008).
Depleting foreign exchange reserves is another cause for concern, as the available import cover is lowered, along with an adverse impact on India’s foreign debt sustainability. The depreciating rupee will do little to increase India’s exports, given similar depreciation in the currencies of India’s competitors and the global slowdown in demand.
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