New Delhi, July 16
The decline in the value of the rupee against the US dollar is proving to be a mixed bag for the industry, with some sectors bearing the brunt of it while others, especially software exporters, are hoping for continued gains.
The rupiah, which has depreciated against the greenback, is near the psychological barrier of 80 to the dollar and is expected to remain subdued as the Federal Reserve works overtime to contain inflation, which is at an all-time high, in the USA.
The biggest impact of rupee depreciation will be on imported goods or goods using imported components, and the most sought-after item in this category is a mobile phone.
“Each percentage drop in the value of the rupee has an impact of 0.6% on the mobile phone supply chain due to component imports. The 5% drop (in value of the rupee) impacts 3% on overall profitability, therefore, prices need to rise,” said Pankaj Mohindroo, ICEA President.
On the other hand, he added, “India’s export ecosystem is benefiting.”
“Imports would have become expensive to that extent, but luckily commodity prices have started to come down,” Mohindroo said.
Regarding the impact of Rupee depreciation on the software sector, Deepak Jotwani, Assistant Vice President and Head of Sector – Corporate Valuations, ICRA said, “As a significant portion of revenue industry is denominated in US dollars, the depreciation of the INR against the USD has supported revenue growth and industry margins to some extent historically.
If the recent weakness seen for the INR continues over the next few quarters, he said, “the depreciation of the INR should boost industry profits in fiscal year 2023.” Sumit Pokharna, VP – Fundamental Research, Kotak Securities, said Indian IT companies are facing cross-currency headwinds emanating from 5%, 6.6% and 1.7% appreciation in the USD against the EUR, GBP and AUD, respectively, in Q1FY23.
“Optically, the depreciation of the rupiah may appear as a headwind, however, cross-currency headwinds provided only marginal tailwinds for the quarter,” Pokharna added.
Regarding the impact on the steel sector, Alok Sahay, Secretary General of the Indian Steel Association (ISA), said that although the depreciation of the rupee against the US dollar would have an impact on input costs of the domestic steel industry, “there may not be an immediate impact on the cost of domestic steel production as the impact occurs with a lag of two months or more depending on the inventory cycle maintained by producers of steel”.
He further stated that coking coal is one of the major inputs for steel production apart from iron ore (available domestically) and any decline in the rupee would lead to an increase in the price of coal imported.
Experts in the energy sector are of the opinion that the depreciation of the rupee will drive up the costs of imported components.
“This will increase our import bill in terms of INR and further amplify the need to increase the share of renewables in our energy mix. to avoid going from a reliance on Big Oil today to a reliance on Big Shovel tomorrow.
“Such proactive and comprehensive sourcing and processing will help us manufacture our energy profitably in India and move towards the energy security we so desperately need,” said Pavan Choudary, Business Intellectual and Chairman of Blue Circle.
Director of the Medical Technology Association of India (MTaI), Sanjay Bhutani, said the medical device industry is already facing the brunt of several inflationary challenges owing to the steep rise in the cost of transportation charges as well as the l limited supply of raw materials.
“The devaluation of the rupiah has compounded the already difficult terrain for the industry and increased the cost of imports of essential medical devices. While we appreciate the government’s commitment to improving the ease of doing business, we hope some leeway will be given to the industry to absorb these hits,” Bhutani said.
According to the latest data, the country’s imports rose 57.55 percent to $66.31 billion in June from the month a year earlier.
The merchandise trade deficit in June 2022 was estimated at USD 26.18 billion compared to USD 9.60 billion in June 2021, an increase of 172.72%.