From airlines and tyre-makers to auto-component manufacturers, industries feel the heat from a weak rupee

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The rupee has touched record lows against the dollar, pushing up India’s import bill, elevating concerns over inflation and hurting the margins of many businesses that are significantly import-dependent.

On Tuesday, the rupee fell below the psychological 80 mark to the US dollar; it has fallen by more than 7 percent since the start of the calendar year and by nearly 14 percent since March 2020.

While the government has been at pains to point out that the Indian currency has appreciated against other major currencies like the euro and the Japanese yen, some industries are set to face headwinds with a major spike in input costs.

The airline business fears that the currency fluctuation will impact its bottom line significantly. An industry veteran, who did not want to be identified, described the tough choice before airlines: heightened competition would not allow them to raise fares even though more rupees are needed for paying aircraft lease rentals, jet fuel and making payments for information technology (IT) systems because all these are dollar-denominated payments. Most of these payments cannot be deferred.

Airfares increase  

An analysis by travel portal ixigo shows that one-way fares between New Delhi and Pune were up nearly 40% between January and June this year. The increase in one-way fares between Bengaluru and New Delhi is a fifth or 20 percent and on the busiest domestic route (New Delhi-Mumbai), the increase is a whopping 38 percent during the six-month period.

For international travel, fares have doubled on the Mumbai-New York route between January and July; and the increase has been almost 60 percent on Mumbai-Dubai and Mumbai-London sectors. So despite airlines desiring further fare hikes to offset input cost pressures, hikes may not be feasible just yet.

Deepak Rajawat, Chief Commercial Officer of Vistara, says up to 60 percent of an airline’s costs are dollar-denominated and rupee depreciation also pushes up fuel prices. But international operations provide some buffer against currency fluctuations.

“We operate internationally so some of our revenue collection comes in dollars too. This works as a natural hedge as some payments can then be made by the dollars thus earned. Larger an airline’s international operations, bigger the hedge. But we are not a cost-plus industry so it is difficult to pass on the increase in the costs to the end-consumer. India is a price sensitive market.” For now, some internal belt tightening is all airlines may do.

In any case, July-September is the lean season in Indian aviation market and airlines are wary of upsetting flyers. Already, from a peak of 395,000 flyers a day in June, the daily footfall has come down to about 300,000 or 325,000 in July.

Travellers’ woes 

So the weakening rupee, high jet fuel prices and the inability to raise fares will only make their balance sheets weaker.

An airline analyst pointed out that carriers could skimp on purchasing spare parts – one budget carrier has been in the news recently for allegedly buying second-hand parts or those with dubious warranties and consequentially suffering multiple snags mid-air – and could delay lease rental payments too, albeit with the threat of legal action by lessors hanging on their heads.

And as life gets tougher for airlines, the depreciating rupee obviously also has implications for the intrepid Indian traveller. Aloke Bajpai, Group CEO and co-founder at ixigo, says higher airfares would make domestic as well as international travel more expensive.

“However, if travellers are visiting countries where the currency is also falling, like in Europe, then it will not have much impact. A weaker euro can in fact provide a huge price advantage to travellers with cheaper hotel rates and attraction fees,” he points out.

A depreciating rupee is expected to hurt many businesses even though for some, like software, a weakening rupee brings cheer and for some others like the steel industry, hardships may come with a lag.

Tyre and auto-component makers 

India’s auto component makers are also vulnerable to currency fluctuations in the long run. Take the case of the tyre industry, which has a significant import dependence.

Rajiv Budhraja, Director General of the Automotive Tyre Manufacturers Association (ATMA),  points out: “Multiple raw materials are being imported for the tyre industry. Natural rubber (where import dependence is up to 40 percent because of gaps in domestic production), synthetic rubber, carbon black are principal raw materials which are being imported. So the input costs for tyre makers have risen in tandem with the depreciation of the rupee against the dollar.”

A tyre industry executive said that input cost pressure may be passed on to the vehicle makers “as and when required”. Like other component makers, tyre manufacturers have already had to cope with less-than-optimal two-wheeler demand since the economy opened up post-COVID-19 and were eagerly waiting for the festive season this year for demand to pick up across dealerships.

The rupee-dollar saga may dampen some of the festive sentiment, though surging tyre exports in recent months have been bringing some cheer to the industry.

And Vinnie Mehta, President of the Automotive Components Manufacturers Association (ACMA), points out that currency fluctuation may not have any significant impact on the component makers in the short run because large component makers have long-term contracts and de-risk their business by taking covers.

“But in the long run, a weakening rupee will adversely impact component imports,” he says.

In the year ending March 2021, India imported $13.8 billion worth of auto components. In that year, engine components and transmission drives together accounted for nearly half of the imports in value terms at nearly $6.9 billion.

Mehta says the impact of currency fluctuation in the long run shows in the bottom line of component makers, as they are not always able to pass on the hike to the consumer. “Also, for those companies where the import percentage is large, consumer demand gets impacted.”

For some vehicle original equipment manufacturers (OEMs), strengthening of the rupee against other currencies may be beneficial.

An analyst said companies like Maruti Suzuki India, which import some raw materials from Japanese suppliers and make payments in the yen, will see some of their costs getting rationalised.