MC Explainer | Rupee at record low: Positive and negative impacts on sectors

A weaker rupee causes imported inflation, particularly in commodities such as oil, which can impact overall prices.

Although the Sensex and Nifty reaching new highs, the Indian rupee is currently near its all-time low, showcasing a seeming disconnect. This disparity can be attributed to various factors, including a 5-year low liquidity deficit that restricts the Reserve Bank of India's (RBI's) ability to intervene in the foreign exchange market by selling dollars. Additionally, there is robust demand for dollars from importers of oil and gold, contributing to a broader trade deficit.

Market analysts are expressing optimism about the Indian markets, anticipating a positive trajectory and the possible return of foreign investors. Given these expectations, traders are closely monitoring the rupee, anticipating it to maintain a relatively narrow range, likely fluctuating between 83.00 and 83.40.

A weakening rupee against the dollar can impact various sectors both positively and negatively. Here are a few examples:

A weaker rupee diminishes its purchasing power abroad, resulting in an increase in the cost of imported goods and services. To mitigate this impact, India's ability to manufacture substitutes for these imports becomes crucial as it can stimulate domestic industries. Analysts suggest that successfully replacing costly imports can contribute to economic resilience. However, failure to do so would lead to heightened expenses and further devaluation of the currency, presenting potential challenges for the economy.

According to Akshat Garg, analysts at Choice Broking, a weaker rupee causes imported inflation, particularly in commodities such as oil, which can impact overall prices. It might lead to a widened trade balance and a potential increase in the current account deficit. A weaker rupee may attract foreign investors for higher returns but could raise concerns about currency stability. Government debt in foreign currencies might face higher servicing costs.

India's import composition is predominantly comprised of petroleum, crude, and electronics, making up nearly 22 percent and 13.5 percent of the total, respectively, while gold accounts for 8 percent. The country heavily relies on imports, covering 85 percent of its oil needs and approximately 50 percent of its gas requirements. In October, India witnessed a record-high import figure of $65.03 billion, marking a substantial 12.3 percent increase. This surge was primarily driven by a significant rise in gold inflows, reaching $7.2 billion, reflecting a remarkable 95.4 percent increase.

"Industries reliant on imports, capital-intensive sectors, and those with foreign borrowings will face substantial challenges or negative impacts", said Amit Pabri of CR Forex.

Gainers

A weaker rupee can enhance export competitiveness by reducing costs in foreign markets. Industries such as IT, textiles, and manufacturing are likely to experience increased demand under such circumstances. India's recent GDP growth in Q2 reached an impressive 7.6 percent, with manufacturing leading at 13.9 percent. Analysts say that this trend indicates the potential for substantial gains in the exports of these sectors, particularly benefiting from the near-record-low value of the rupee.

Textile Industry: A weaker rupee has the potential to benefit the industry, particularly with sustained demand from key markets. Presently, India holds the sixth position globally in textile exports, with the USA and the EU constituting 27 percent and 18 percent of exports, respectively.

Tourism: A devalued rupee can potentially attract more foreign tourists to India as it enhances their purchasing power. India welcomed 85.9 lakh foreign tourists last year, according to recent data which was presented along with a written reply to a question by Union Tourism and Culture Minister G Kishan Reddy .

Information Technology (IT) and Business Process Outsourcing (BPO): Depreciation of the rupee can boost earnings from exports and enhance competitiveness in these sectors.

Pharmaceuticals: A weaker rupee can make Indian pharmaceuticals more cost-effective internationally, potentially boosting export volumes. The sector recorded revenue of $25.3 billion (Rs 2.1 lakh crore) in FY22-23, contributing 20 percent to global exports.

Commodities and Natural Resources: A depreciated rupee provides a boost to businesses involved in exporting commodities such as minerals and agricultural goods, as it makes their products more competitively priced on the global market. Notably, in November 2023, coal production saw a substantial surge of 37 percent. This growth was particularly remarkable in non-regulated and commercial mines, which experienced exceptional increases of 101 percent and 98 percent, respectively.

Losers

Import-Dependent Industries: Sectors like electronics and machinery, relying heavily on imports, are struggling with increased costs.

Consumer Goods: Rising production expenses might cause prices of consumer goods to go up, affecting both producers and buyers.

Oil and Gas Sector: Higher import costs in this sector may impact industries reliant on transportation.

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