Twenty-two-year-old History and Political Science graduate Anand Katakam was packing his bags for New York. The Bangalore boy had been accepted to Columbia University’s Graduate School of Journalism. Everything was pitch-perfect, until the rupee shocker hit. Anand had worked out his finances for the year-long course at Rs 54/$ exchange rate, which was what the rupee was at in mid-March, when he received the acceptance letter. The course fee is nearly $60,000, plus another $25,000 for accommodation and living expenses. But the fee was to be paid only in July, when semester starts. By then the rupee had nosedived and Anand’s school costs rose by Rs 5 lakh.

A Sinking ship

The proximate cause of Anand’s troubles can be traced to the country he is headed to. Specifically to Washington D.C. and Ben Bernanke, boss of the Federal Reserve. In late May, addressing US Congress’ economic committee, Bernanke hinted that the Fed’s largesse — it had been pumping in $85 billion every month at near-zero interest rates — could be re-evaluated. The four-year-long easy money policy, intended to create jobs in the US, could end earlier than Wall Street traders had expected. By the time Bernanke mentioned the possibility of a roll back a second time a month later, in June, international investors were already winding down their interests abroad.

Foreign institutional outflow from India in June alone hit a record high of $7.53 billion. To give a sense of scale, the June exit was more than double the previous highest single-month FII outgo — $3.53 billion in October 2008, right after Lehman Brothers collapsed. As money fled in large tranches, a precarious rupee hurtled out of control.

The rupee’s May-July crash has been particularly cruel to students going abroad to start new terms. Take the case of 26-year-old Bhanu Prabhakar, who is heading to Milan for a Master’s in Public Management at the SDA Bocconi School of Management. Despite significant scholarship aid, Prabhakar needed a loan. As the rupee fell over 13 per cent against the euro from May to July, his Rs 20-lakh loan ballooned to about Rs 35 lakh. “A weakening rupee spells disaster for any student’s financial planning,” says Prabhakar, who learnt his first management lesson the rather hard way.

The fun of just holidaying abroad is gone too. A weak rupee has made everything more expensive — air tickets, hotel rooms, cab rides, and shopping trips. Tour operators say that holiday packages have been costing about 20 per cent more in the last three-four months.

The Associated Chambers of Commerce and Industry reports that the number of Indians travelling abroad has fallen 15-20 per cent in the last two months. In January last year, a 10-day holiday to the US for one person would have cost around Rs 1.25 lakh. Today, the same trip will burn a Rs 2-lakh hole in your pocket.

Impacting a gamut of industries, the rupee has also been dragging with it a stock market aggravated by FIIs heading to the exit — and all this has been laid at Ben Bernanke’s door.

Bridging the Forex gap

But it is unfair, besides being grossly incorrect, to blame the rupee’s slide on the Fed’s possible future decision to roll back its quantitative easing programme alone. The rupee has been on the precipice for about two years now; Bernanke’s statement did the equivalent of pushing it over. Bringing the rupee back to reasonable levels is going to be difficult without righting inherent deficiencies in how India handles its short- and long-term forex liabilities.

According to the Reserve Bank of India, India’s trade deficit (the excess of imports over exports) widened from $42.2 billion in the first quarter of 2012-13 to $50.2 billion in the corresponding period this fiscal.

While exporters found their markets abroad showing less and less interest in the country’s engineering goods, gems and jewellery, electronics and iron ore, imports of gold, precious stones, petroleum, and non-ferrous metals have risen significantly.  

The Government has been trying to force close this yawning gap — it’s become a lot more difficult, not to say expensive, to import gold these days — but foreign investors aren’t impressed. The RBI, for its part, has been trying to make the rupee scarce. It has been progressively flushing out excess reserves from the economy to give the currency more staying power.  Bankers say there is an urgent need to raise import duties on costly and non-essential imports such as mobile phones, apples, olive oil, and toys to stem the outflow of dollars.

As the RBI on Shahid Bhagat Singh Road in Mumbai and the mandarins at the Finance Ministry in New Delhi’s sandstone-coloured North Block struggle with plans and strategies to stabilise the yo-yoing rupee, middle-class Indians are, now more than ever before, anxiously watching the rupee ticker on TV.

They have good reason to do so. Forget the fancy machinery or the smartphone, even shuttlecocks cost more these days, as one of our correspondents recently found. A box of Yonex shuttlecocks, made in China of course, costs about Rs 100 more, up 10 per cent than a couple of months ago. Plead with the sports goods store’s salesman that you're a regular buyer and all you are likely to get as change is a helpless shrug. You can almost hear salesman Mohan saying, “It’s the rupee, silly.”

Adding Fuel to fire

With public transportation as inadequate as it is in India, the wallet winces whenever you pull it out to pay for fuel. Oil companies raising prices is now almost a fortnightly affair. The latest shock came on Wednesday, when petrol prices were raised by 70 paise a litre, excluding local taxes.

“Since the last price change, the international price of petrol has gone up from $117.19/ barrel to $120.05. The rupee-dollar exchange rate, however, has (only) marginally appreciated from Rs 60.03/$ to Rs 59.49/$. The combined impact of these factors has warranted a price increase of petrol by 70 paise/litre,” Indian Oil Corporation said in a statement. If you live in Delhi, it will now cost you 84 paise more on every litre you tank up, 88 paise more in Kolkata and Mumbai, and 89 paise more in Chennai.

Kritika Gautam, a 24-year-old research associate in a New Delhi firm, has put back plans of buying a car. “I was going to buy a second-hand car since I commute every day from Gurgaon to Delhi. But because of the frequent petrol price hikes, I’ve decided tobuy the car later and continue using the metro,” she says.

Many others are turning to public transport, despite its shortcomings. Sudipto Roy, an executive at battery-maker Exide, will tell you how the frequent fuel price hikes have wrecked his daily schedule. Till recently, he would drop his daughter at school every day and drive his wife to her office before getting to his own – about 10 km one way. But not anymore. Roy’s wife has started to take the bus to cut down on the daily run. Just saving on that extra two km every day now matters to the Roys.

Importing inflation

As rattled as the aam aadmi is the importer. His end product is getting costlier and because of the slowdown he is often unable to pass on the buck. Upmarket apparel brand Louis Philippe, owned by the Aditya Birla group, imports 35 per cent of its raw material, mostly speciality fabrics and cotton from China and Italy. It may substitute a part of this with local products, “but we can’t completely stop imports,” says Jacob John, Brand Director.

“As far as possible, we will try to absorb the extra costs since consumers have been dealing with price hikes in the last two years. But if the rupee slide continues, we may raise retail prices by Rs 100 at the higher end,” he said.

Shekhar Bajaj, Chairman of Bajaj Electricals, says his company’s imports of fans from China are down to 30 per cent now from 70 per cent earlier. Rising labour costs in China have made manufacturing there more expensive than before and this rise has to be multiplied at a higher rupee rate, he says.

It is red all over for book publishers as forex losses mount. Hachette India, according to its Managing Director Thomas Abraham, prices its books in rupees for the buyer’s convenience, though conventionally trade book imports are priced in dollars or pounds. “We, however, chose to go with a rupee pricing strategy and thus our prices are unchanged for customers. Should forex continue at these untenable levels beyond three months, we will have no option but to raise prices,” he adds.

No windfall here

But isn’t the rupee’s depreciation a windfall for exporters? The IT industry is laying that assumption bare. Sujit Sircar, Chief Financial Officer at iGATE, in an earlier interview to this paper, had said that though every percentage dollar gain raises the company’s margins by 25-30 basis points in the near term, the mid-term scene is a double whammy. “Costs such as travel and power will go up. Also, all import costs will impact our capital expenditure,” he said. On the other hand, clients will want to renegotiate deals at rates that favour them.

Announcing the company’s first quarter results last month, Rajiv Bansal, Infosys CFO, had denied any positive rupee effect on profit. “Almost 98 per cent of our revenues come from outside India. If you look at the US data, it seems to be looking much better — (especially) their housing and macro-environment parameters… So the yields are going up, a lot of FII money is going back to the US, resulting in the dollar strengthening and that translates into their economic growth. But this is not resulting in (our) clients doing better, so it hasn’t translated into a better scene for us.”

Still, these are large corporates with deep pockets and the ability to handle forex shocks. Students, and the general public, remain at the mercy of the currency markets as, unlike the wheeler dealers of global finance, they can’t hedge their currency risks. With student loans usually fixed, even if the rupee recovers, the Anands and Prabhakars will have to pay their loans off at the higher exchange rate contracted. And therein lies the rupee’s sting.

(Inputs from Ashwini Phadnis, Aesha Datta and Navadha Pandey, New Delhi; Purvita Chatterjee, Rahul Wadke, Nivedita Ganguly, Satyanarayan Iyer, K. Ramkumar, Mumbai; Vinay Kamath, Swetha Kannan, N.Ramakrishnan, Chennai; and Abhishek Law, Ayan Pramanik, Kolkata.)

Who moved my rupee?

Many reasons have been trotted out for the lacklustre rupee over the last two years. Here’s a quick checklist:

Balance of payments: When a country imports more than it exports, the demand for foreign currency is higher, thus weakening the domestic currency. This trade deficit has been the main bugbear for the rupee. Export growth has been contracting, with a slowdown biting the economies of trade partners, but imports have been growing unabated, led by crude oil and gold. The trade deficit has widened to its second-highest ever level in May this year.

This gap has so far been bridged with capital account flows, either direct or portfolio investments. But these flows also did a U-turn in the second quarter of 2013 on fears of the US Federal Reserve ending its stimulus programme. As global traders panicked, there was a large exodus of foreign funds out of Indian debt and equity markets.

External debt: The money owed by Indians (government, companies and individuals) to entities abroad also has a bearing on the rupee. This debt has been rising due to trade credit taken by importers and by Indian companies borrowing overseas. At $390 billion, the country’s current external debt is far from comforting. Further, the share of short-term debt has also risen to 44.2 per cent of total debt, which means there will be more pressure on the rupee in the near-term.

Inflation: The exchange rate of a currency depends on how much it can buy of the currency it is rated against. Inflation erodes the value that one currency can fetch against another. And consumer price inflation in India places the rupee at a disadvantage. - Lokeshwarri S. K.

How the exchange rate is calculated

An exchange rate is the price of one country’s currency expressed in another country’s currency. Two systems are used to determine a currency’s exchange rate — floating and pegged.

A floating currency’s value is determined by the market, that is, it is only worth whatever buyers are willing to pay for it. So supply of and demand for the currency, in the form of foreign investments, the import-export balance and inflation, play a role.

A floating system is used usually by mature, stable economies since it is considered more efficient. However, it does have drawbacks. For example, if a country’s economy is instable, a floating system will discourage investment.

In the pegged exchange rate system, the government sets and maintains the exchange rate. The rate is pegged to some other country’s currency, usually the US dollar. The advantage here is that the rate does not fluctuate every day.

In such a system, the government has to ensure that the real market value of the currency is reflected by the pegged rate, failing which people may look to switch from that currency to more stable ones. Also, the central bank must hold large reserves of foreign currency to mitigate changes in supply and demand.

In reality, few exchange systems are fully either. Countries using the set rate can avoid market panic and inflationary disasters by adopting a floating peg that tracks the US dollar.

In the floating system, governments make changes to their national economic policy, affecting the exchange rates directly or indirectly.

Tax cuts, changes to interest rates, and import tariffs can all affect the value of a nation’s currency, even though technically the value is floating. - Arvind Jayaram

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