ANALYSIS: Indian Rupee Continues its Forex Fall
Mahanth S. Joishy, Editor-in-Chief
The Indian rupee has continued falling steadily against the US dollar this May, breaking new record lows continuously through recent weeks. The free fall continues, and as of today the magic number stands above 56. This news is unwelcome to Indians in an environment that includes severe hikes in Indian fuel prices, and dramatic drops in Indian stock market indices.
Some of the causes and consequences may seem obvious, while others appear murky in the crystal ball. Below is a pithy analysis.
It’s All Greek to Indians. Or is it? Indian Finance Minister Pranab Mukherjee has blamed the eurozone crisis for the downward spiral and claims the government has taken, and will continue to take measures to stop the bleeding such as selling off dollar reserves. At least several economists have disagreed that Greece & Co. are to blame, and think the problem starts closer to home, in Asia. Or could it be about the price of oil?
Vacationers Beware. Indians who planned business or pleasure trips abroad will unambiguously take a hit because buying power is compromised. Meanwhile, Americans and NRIs traveling to India will be pleasantly surprised to find that their dollars are going further all of a sudden within the same trip. In theory the Indian tourism industry should benefit from increased domestic travel and foreign vacationers as a result, but the Air India pilots’ strike and Kingfisher Airlines woes have kept prices high. People also tend to book vacations well in advance.
Exports and Imports. America is India’s biggest trading partner. Indian companies who depend on exports to the West will enjoy the rupee’s fall in price, but are finding that some foreign customers may ask for discounts, partly nullifying short-term gains. American manufacturers and service providers with sales to India are going to find it difficult to keep export prices low. This is not welcome news for the Obama administration and we expect that the US government will attempt to assist if the slide continues, though we have not yet heard official word on this. On the other hand, analysts opine that the free fall must be solved by the Indian government itself.
Business Process Outsourcing. The BPO industry is one of India’s most important, and the planning for BPO companies has just gotten a lot more difficult.
The Non Resident Indian Effect. NRIs will be pleased that their investments in real estate and remittances to relatives will go further. The rupee slide will likely encourage a fresh flow of cash into India.
Coming to America. Like every summer and fall, a massive crop of Indians are readying themselves for their trip to America for higher education, jobs, or marriage. Many are coming for the first time. Unlike tourists they intend to stay for a long time and often, for life. That means they’ll never get their losses back, especially on university tuition- a real killer. Those bringing a large amount of savings with them will be hoping for a recovery of the rupee soon, for they stand to lose a hefty chunk at the time of exchange. But it’s also a trap; fears of the rupee falling further will prevent many from delaying this inevitable shift in funds from one currency to the other.
Again, the crystal ball is murky. But with (a) paralysis in both US and Indian governments on most major questions, (b) uncertainty in the Eurozone, (c) volatile oil markets, and (d) a sputtering Indian economy, we expect that the conditions causing the current slide in the rupee will be around. These make the path to 60 Indian rupees per dollar a legitimate possibility in the near future.