Indian firms will be “severely” hit by the rupee’s plunge to record lows due to their hefty foreign debts, the nation’s top credit ratings agency Crisil Research warned Wednesday.
The rupee has been the worst performing Asian currency this financial year on worries about a rollback in US monetary stimulus that has spurred investor flows to emerging markets, and a sharply slowing domestic economy.
Sectors likely to be hardest hit include the already struggling car market, auto parts, airlines, consumer goods, oil marketing companies and fertilisers, Crisil warned.
Countries that rely on Indian tourists to bolster their tourist arrivals could be hit if the rupee continues to weaken against the dollar. Most travel firms and hotels dealing with India will quote in dollars which will make holiday costs more expensive for India, now identified as one of the top emerging markets for Asia Pacific destinations after China.
Indian companies will be “severely impacted by the rupee’s depreciation against the dollar given the large foreign currency debt on the books and only partial hedging”, Crisil added.
Hedging is an investment tool to protect against unfavourable price movements.
“Corporate India has foreign exchange debt of over US$200 billion as of 31 March of which close to 45% is short-term debt and moreover, only half their foreign exchange exposure is hedged,” Crisil president Mukesh Agarwal said.
Even exporters are unlikely to benefit much as customers “may seek to renegotiate contracts” in a fiercely competitive global market, said Crisil, whose majority shareholder is global agency Standard and Poor’s.
S&P has a negative outlook on India’s investment credit rating which is only one notch above “junk”.
The rupee struggled higher Wednesday to end the day at 59.65 to the dollar, helped by steps by authorities to curb speculative trading after it hit a lifetime low of 61.21 to the dollar Monday.
Crisil forecast the rupee will strengthen from current levels, but that it would still trade an average 5% to 8% lower this year than last.
Indian firms had been borrowing abroad to take advantage of far lower interest rates than available domestically but the rupee’s slide has sharply lessened the advantages.
However, India’s flagship outsourcing industry, which bills in dollars for such services as call centres, accountancy and software development, should benefit from the rupee’s decline.
Other gainers should include pharmaceutical and garment exporters, crude oil producers and refineries, Crisil said.
Crisil added that competitiveness and demand growth were far more vital to profitability than a weakening currency for export firms.
In the last financial year when the rupee fell by 14% against the dollar, 180 listed export firms reported just 1% to 2% revenue growth in dollar terms, it noted.
Aside from the effects of an economy growing at its weakest level in a decade, the rupee has been dragged down by a record current account deficit, the broadest measure of trade.
The deficit stems mainly from huge oil and gold imports and weak exports.
In another move to curtail rupee speculation, the central bank may ask oil importers to route their dollar purchases through a single bank to avoid competitive quotes, local media reported Wednesday.
The rupee is under pressure as Finance Minister P. Chidambaram is in the United States this week on his second trip in three months to woo foreign investment — seen as vital to strengthening the currency and spurring economic growth.
But he is seen as hampered by political opposition at home to more steps to prise open India’s still heavily state-dominated economy and investor concerns about widespread corruption.