Rohit Joshi, Ajay Vaishnav & Siddharth Tak / ZRG
Rupee’s free fall against dollar – Indian Rupee breaching the psychological mark of 57 against dollar on Thursday – in the currency market has spread anxiety in India. But, not all sectors are going to be adversely affected with a lower rupee value. Key sectors like Information Technology, Pharmaceutical and Textiles will benefit from a higher dollar value as bulk of their revenues come from overseas markets.
For IT sector, in particular, the gains are significant considering lower overseas demand. A percentage drop in the value of rupee improves the margins of IT companies by around 50 basis points. Pharma too stands to gain as a majority of its income is generated in international markets. Take for instance the case of Sun Pharma, US constituted around 54 per cent of the gross sales in fiscal 12-13. Another pharma major Dr Reddy’s receives 45 per cent of its revenue from the North American market.
The bad news, however, is for sectors such as Oil and Gas, metal, power, telecom, FMCG. They will lose on account of higher dollar value. Their dependence on imported commodities and technology will make increase operating costs thereby reducing the profit margins. Besides, companies having foreign currency loans in their balance sheets will find it expensive to meet their loan commitments.
Taking a gloomy view of rupee fall, Avinash Gorakshakar, research head, miintdirect.com says, “Rupee depreciation is positive for IT, pharma, textile, auto components companies as they are exporting in a big way. However, the rupee fall is not perceived well by the markets. 60-65 per cent of companies are import dependent hence earnings of such companies will be negatively impacted. Petrochemicals, metal, trading companies would be adversely impacted. Even government calculations go for a toss whenever rupee depreciates.”
During normal forex market situation, software companies hedge their risks through forward contracts, explains A K Prabhakar, senior vice-president, equity research at Anand Rathi Financial Services.
“Most technology companies hedge their forex position by forward contracts. On the other hand, commodity related companies like Oil and Gas, FMCG will suffer as the higher import cost will hit the margins,” he says.
The current weak outlook on rupee portends bad for macro-economy. To prevent rupee fall, RBI may avoid key policy rate cuts.
“In this month, you can witness lot of volatility in rupee and it may test levels of 58.5. If rupee depreciates further on the back of dollar strength then it is a bad news for the markets and RBI won’t go for a rate cut on June 17 credit policy. Furthermore, the bigger concern is that our current account deficit (CAD) is mainly funded by FII flows and if FIIs flows slowed down then it may pose a dangerous situation for the Indian economy,” Gorakshakar at miintdirect.com points.
The problem is not India specific. In fact, all emerging market currencies are weakening against dollar thereby putting the global economic recovery at risk.
“It is more of a currency play as most of the emerging markets are facing problems like Japan. Rising CAD is still a threat to the domestic economy. Moreover, foreign remittances have reduced which has also been impacting the rupee,” concurs Prabhakar at Anand Rathi.