Economic Highlights

New Delhi, 13 January 2012

Falling Rupee

WINDFALL AMIDST DESPAIR

By Shivaji Sarkar

The falling rupee has come as a windfall for some amidst national despair. Non-Resident Indians are flooding the banks with dollar deposits to boost their income. It has an increased inflow, despite weak demand globally of the IT companies. Those who get salaries in dollar terms have seen a sharp rise in accrual to offset domestic inflation.

Dollars sent back by relatives abroad as in Kerala, Punjab, Gujarat and some other States are worth more now. Every thousand dollar now earns Rs 10,000 more as rupee plunges to 53 to a dollar against Rs 43 in January 2011. The rupee has plunged about 15 per cent against the dollar since early 2011. It has become the worst-performing of Asia's 10 most-traded currencies.

The banks have received $1.7 billion in November alone. It is a reversal of trend seen in 2010, when all through the year only $.2.2 billion NRI deposits were received. Between April and November 2011, $ 6.3 billion have been received as deposits. This in a way is taking care of the falling FDI.

However, the number of people receiving their salaries in dollar terms is not very large. But a few working for some foreign companies in India such as in the media, or managing businesses of many others have suddenly got a raise. Happily for them for the past three months their salaries are shooting up every month. Expatriate remittances from West Asia has increased manifold, according to London-based currency specialists First Rate FX, as the rupee touches new lows.

While exporters are supposed to earn more, those in the apparel business have not gained despite the windfall as their businesses, mostly in the US and Europe, fail to pick up. Low consumer demands even during Christmas did not help them earn more. While in terms of the dollar, their products are cheaper, the flip side is the export demand has come down. Multi-brand companies like Tesco are in crisis and this definitely hits the Indian exporters.

In recent years, the currencies of many countries have depreciated against the US dollar. The impact of the depreciation on remittance flows to developing countries has emerged as a serious subject of study amongst economists and policy analysts. In particular, the impact of remittance flows for the Philippines, Mexico and India, the three countries among the largest remittance-recipients, is of immediate concern for economists and policy planners. However, China has a different problem. Its currency yuan is continuously appreciating, and as a result Chinese goods are becoming expensive in the US market and remittance from there is yielding less.

The UAE, home to 1.7 million Indian expatriates, accounts for nearly 13 per cent of the total remittance flow into India. Remittances to States like Kerala have increased from Rs 36,886 crore in 2010 to Rs 41,719 crore by end of 2011. Fortunately, the rise continues.

Kerala’s 25 lakh families of NRIs and about three lakh in Punjab along with some others have started earning more. The remittances, according to an estimate of Centre for Development Studies, are likely to increase to Rs 60,000 crore. Even families receiving small remittances of say $ 500-1000 have seen their earning rise by Rs 5,000 to 10,000 a month.

This, however, has a fall-out in the rate war by banks for luring deposits. Some have increased it to 10.10 per cent against the average of 9.5 per cent. Federal Bank assistant general manager C Geroge Mathew states that there could be an increase of about 20 per cent in deposits following the rupee’s fall. But the rising interest rates may affect the cost of funds in the long run. There could be a surplus of deposits over advances, which is not a happy scenario for the banks.

But Mathew need not worry. The National Sample Survey figures show that the Malayalis have emerged as the highest consumers. It is almost 30 per cent more than the national average. A large part of the remittances may be utilised in purchasing jewellery, fancy goods, luxury homes or in hotels and resorts.

Even for the IT companies, the weakness of the rupee has come as a huge relief. Their business in the US and Europe is on a downturn. Their dollar earnings are plunging. But revenues in rupee terms are expected to show a healthy trend. A leading broking house CLSA noted that companies such as Infosys are best placed to capitalise on the weak rupee.

In fact, the IT industry hopes to increase business from Africa, Asia and Australia. The orders from the US and Europe are likely to decline. Large companies say the Infosys, Wipro and TCS may manage to remain in the market but mid cap companies may have to rough the weather. Overall, in dollar terms the revenue growth is likely to moderate to 2 to 3 per cent compared to 4 to 5 per cent expected earlier.

Another sector that is likely to gain is that of tourism and travel provided there is an improvement in conditions in the West. Falling rupee would make these services cheaper and more affordable for visitors. But the inflow of tourists during the past three years has remained around 5 million – 5.08 million in 2008, 5.28 million in 2009 and 5.11 million in 2010. Tourist arrivals slumped in 2010 as Europe went into a crisis mode and the US had yet to recover.

However there is a down side too and it is not all so hunky dory with the falling rupee. It has put extra burden on companies, which had sought borrowings from the West. Repayments would become expensive. Many Indian companies which were investing abroad have stopped doing so as they want to avoid risk in a volatile global market. Similarly, foreign investment flows to India have also slowed down. The investors do not want to take a risk as their repatriation of profits is likely to fall on a weak rupee.

Additionally, Indians going abroad for studies are finding an increase of 15 to 18 per cent in their expenditure. Some have cancelled, while others are rescheduling their visits as foreign universities want guarantees for their payments. Imports of machineries, aircraft, scientific equipment, minerals and petroleum products are becoming expensive. It is adding to inflation despite some fall in vegetable prices. Petroleum price inflation still remains at a high of 14.7 per cent.

Indeed, what is a crisis for many has turned out to be an opportunity for others.---INFA

(Copyright, India News and Feature Alliance)