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Falling rupee, rising woes

business Updated: Nov 19, 2011 02:57 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Planning to study abroad? Or maybe considering an overseas holiday? There might be worries ahead for you. Your budget just ran up.

Also, expect your computers and imported mobile phones to become costlier.

The rupee closed at 51.33 to a US dollar on Friday, crossing the 51-rupee threshold, and seems going towards the all-time low of 52.17 it touched in March 2009. How budgets may wobble

In simple terms the foreign currency you need to buy the same goods or services has gone up in rupee terms - be it a holiday, a university course or an imported item.

It is good for exporters, though. But with a catch.

"We do not know how currency markets function. Volatility doesn't help us because we do not know how to hedge on a daily basis," said a Tamil Nadu based leather goods manufacturer and exporter. Currency market 101

As the head of a company that exports footwear, he is a small businessman with a big worry - the cost of his raw materials like leather and shoe uppers are rising rapidly changing every day, with the rupee sliding.

Economists expect the rupee to fall further.

The exchange rate of a currency, like most commodities, is determined by the laws of demand and supply. Foreign institutional investors are cashing out and diving into safer investment bets such as US government bonds. This is making dollars scarce and reducing demand for rupees.

The Reserve Bank of India (RBI) can intervene and prop up the rupee by selling dollars in the market, but economists do not expect the central bank to manage the rupee's rate actively, unless it swings violently.

"Given recent indications, I don't think the RBI will actively intervene to arrest the rupee's fall, unless there is extreme volatility in the currency market," said NR Bhanumurthy, economist at the National Institute of Public Finance and Policy (NIPFP).

Exporters may gain from the weaker rupee but their orders may be shrinking or growth slowing. India's exports growth moderated to 10.8% in October. Orders from countries in Europe, India's largest export market show signs of drying out.

For importers, the loss equation is clear: a falling rupee means they have to pay more in rupee terms to buy the same products - capital goods for heavy industry and intermediate products, and crude oil.

A persistently falling rupee widens oil firms' crude import bill and may force them to raise retail prices of petroleum products.

For the government trying to contain inflation close to double-digit figures, a higher oil import bill will raise the spectre of high inflation again.

Costlier transport fuel will knock up prices of most goods and stoke inflation, which may force the RBI to raise interest rates even further to tame prices. Or at least, hold back on a planned cut in rates.

Clearly, there is a million-dollar headache ahead for the government.

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