Russia-Ukraine crisis: Rupee fall to aid exports, hit margins


By Shubhra Tandon, Rajesh Kurup & Banikinkar Pattanayak

As the rupee hit a fresh trough of almost 77 against the greenback on Monday, exporters expected the weakening currency to partly offset the impact of elevated shipping costs and supply chain disruptions in the wake of the Russia-Ukraine crisis. If the rupee stabilises at a depreciated level in the next one month or so, it will support exports, they told FE.

But at the same time, a weak currency — coupled with a spike in global crude oil prices — would inflate India’s import bill and pressure the current account, as New Delhi is a net commodity importer. This will also feed into inflation, cause a further surge in the already-elevated input costs for companies and further erode their margins, senior corporate executives cautioned. Even the currency hedging costs of large firms tend to go up in such situations. The cost escalation could hit the cash flow of firms and potentially delay the completion of housing and other infrastructure projects, some of them said.

The cost of capital goods, mostly imported, will also go up at a time when the government has stepped up focus on capital spending to spur economic growth. India imported machinery worth almost $40 billion and transport equipment, including auto components, of another $13 billion in the first 10 months of this fiscal. Together these two segments made up as much as 11% of the country’s merchandise imports.

Niranjan Hiranandani, MD at Hiranandani Group, said: “Depreciating rupee hits real estate by way of costly raw materials, labour and transportation, with an underlying impact on the project viability in the long run.” A weak rupee will inflate crude oil import bill, which, in turn, will lead to high fuel and logistics costs.

The domestic currency has shed as much as 3.5% against the dollar this year and 3.2% since Russia’s military operations in Ukraine on February 24.

A Sakthivel, president of the apex exporters’ body FIEO, said the rupee depreciation comes as a boon for exporters in general. This is especially true of industries like software and textiles where the dependence on imported raw materials is limited. However, it will also push up costs of manufacturing firms in sectors (like petroleum and gems and jewellery) that rely on large volumes of imported inputs for domestic value addition and subsequent re-exports. It will particularly hit MSMEs in these sectors, he added. This is because large corporations usually resort to currency hedging to beat volatility in the forex market.

Not just crude oil but the prices of another key raw material for various industries, coal, are set to rise. After a steep 65-70% sequential increase in the cost of coking coal in the third quarter of FY22, a further increase of 15% (quarter-on-quarter) is expected in the March quarter, ICRA said in a report. “Though price of iron ore has moderated somewhat from the highs of the third quarter, and domestic mills have announced some steel price hikes from late January 2022, these will not be able to entirely compensate for the steep rise in coking coal costs,” said Jayanta Roy, senior vice-president & group head (corporate sector Ratings) at ICRA.

Utkarsh Sinha, MD at Bexley advisors, a boutique investment banking firm, said for most firms relying on foreign inputs, prices are negotiated well in advance and locked in. “Most domestic manufacturers lack sophisticated currency hedging solutions to insulate them from such (currency) shocks. The result is that a lot of manufacturers will take short-term hits, and we will see some of these prices passed on to consumers where possible which will create additional inflationary pressures.”

Jay Prakash Gupta, founder of Dhan and co-founder of Raise Financial Services, said for industries like glass, plastics and FMCG, which import raw materials to manufacture finished goods, the weakening domestic currency will pressure their margins considerably in the coming quarter.

“Broadly, weak rupee may help some industries but it is largely negative for the economy as a whole. A rupee range of 73-75 is a healthy one,” Gupta added.

Engineering goods exporters, who also depend on imported inputs, stressed the need for stability in the local currency. Mahesh Desai, chairman of EEPC India, said volatility doesn’t help exporters as well, because they can neither “factor in the price changes of products nor predict them”.

Harsh Vardhan Patodia, president of the real estate body CREDAI, said a weak rupee drives up impacts on the cost of services, raw materials (like steel and cement), labour wages, transportation cost and subcontracting of architects, engineers and builders.

“Also, if competing countries’ currencies also depreciate then there is no gain,” he said, adding that once the rupee starts depreciating, “our importers also demand lowering of prices”.

Importantly, according to the RBI’s real effective exchange rate (REER) index, based on the export-weighted average of about three dozen currencies, the rupee was “over-valued” by over 4% in January.

“It can cause escalations in the budget and delay the time-frame of projects, thereby, impacting buyers and builders alike in the long run,” Patodia added.