Empowering MSMEs with News & Insights

Impact of falling Rupee on MSMEs

Updated: Jun 27, 2013 01:09:03pm
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From Swati Dayal

New Delhi, June 27 (KNN) Sustained depreciation of the rupee has caused anxiety in the market. While about 10 per cent dip in rupee value would help exporters, imports become expensive.

Every time the Indian currency depreciates against any foreign currency it has more negative impacts than positive, since we are a net importer country.

The dollar is trading well above Rs 60 to a unit today.

What are the implications for the MSMEs:

IMPORTS: The falling rupee has made imports dearer and is adding to the strain in the current account. A weak currency makes imports expensive which should normally lead to a curtailing of imports.  However, some of India's major import items, like crude oil, are not affected much by the price changes.

The rupee’s recent plunge against the US dollar has hit the small importers, who lack the financial resources to engross large losses from currency fluctuations. The small importers have to bargain with the overseas suppliers to lower prices for goods that have already been shipped. When the rupee falls against the dollar, importers have to pay more rupees for goods priced in dollars.

EXPORTS: Exporters reap the benefits when the rupee falls. However, they are the ones who are hit hardest when the currency rises. When a currency depreciates, the exporters get a boon as they get more of the local currency for every unit of foreign currency though the quantum of trade remains unchanged.

The sharp increase in the rupee’s volatility in the past two years has also made it difficult for traders to manage their currency exposure.

VOLATILITY: The high volatility in the currency is affecting business decision making as the traders have not been able to finalise their future orders. Most contracts for exports and imports take place over a three-six month period. The buyers are asking for discounts every time the rupee falls.

INFLATION: 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. 

Sustained depreciation of the rupee will fuel inflation and have fiscal implications due to rise in the subsidy bill. 

Earlier, brokerage firm Nomura said in a research report that given a large share of global commodities in the WPI basket (around 35 per cent), a depreciating currency will add to imported inflation pressures. As per the research firm's estimates, every 10 per cent depreciation in rupee leads to 60-80 basis points rise in WPI inflation. 
 
HEDGING: India’s central bank has been urging companies to hedge their overseas exposure to shield themselves from currency volatility. But it says most imports are not hedged against currency risks.

Analysts say hedging requires a cost and too much hedging can be counter-productive. (SD/KNN)

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