How the weakening rupee is affecting India's economy

Importers are bearing the brunt of the currency's slump but millions of Indians working abroad are taking advantage of the favourable exchange rate to send money home

Men carry an air cooler onto a bicycle in New Delhi. The weakening rupee is affecting the country's imports, making goods more expensive for consumers. Bloomberg

The weakening Indian rupee has become a headache for Harsh Shah, who owns a company in India that imports and sells kitchenware.

Mr Shah is watching the currency's movements closely because the exchange rate affects the price of goods he imports.

“The depreciation of the rupee is a significant setback for us,” says Mr Shah, founder of Rupa Steel Centre, which is based in the state of Gujarat. “Even a downfall of the rupee by a small amount makes a huge difference.”

The rupee hit a record low of 77.85 against the US dollar on Thursday. So far this year, it has dropped almost 5 per cent.

Foreign capital outflows from emerging markets amid Russia's war with Ukraine, the tightening of liquidity by central banks globally and high oil prices are putting pressure on the rupee.

Analysts do not believe the currency's slide is over, with some forecasting that it could move towards 80 against the US dollar.

The rupee’s slump is having far-reaching effects, from making imported goods and materials more expensive for businesses such as Mr Shah's to driving up inflation as higher prices are passed on to consumers.

However, others are benefitting from the softer currency, as Indians working abroad can buy more rupees with their foreign money.

Property developers are reporting a spike in Indians overseas buying homes as they have more purchasing power because of the exchange rate.

Indian exporters are also benefitting as their goods and services become more competitive in price and they can boost their earnings when they convert foreign exchange income to rupees.

“A weaker rupee has multiple implications for the economy,” says Sandeep Bagla, chief executive of Mumbai-based Trust Mutual Fund.

“It is expected that the Indian rupee could depreciate against the US dollar. If the pace is sharp, there could be concern as it could lead to inflation and general instability in markets.”

The rupee will depreciate to an all-time low of 78.20 in the near term and 78.50 in the medium term, according to Religare Broking.

“The rise in crude prices owing to supply tightness is further accentuating inflation concerns and inflicting damage on the global economy, already strained by the monetary policy tightening path of the major central banks and the Russia-Ukraine crisis,” says Sugandha Sachdeva, vice president of commodity and currency research at Religare Broking.

“These are the key headwinds playing out in the current scenario for the domestic currency and leading to a flight of foreign capital flows while increasing the demand for the safe-haven dollar.”

Capital Economics projects that the rupee could fall to 80 against the dollar next year. However, there is also some speculation in the market that it could hit that mark much sooner.

For the millions of Indians working abroad, any slump in the rupee creates a good opportunity to send money home.

UAE-based money transfer company Al Fardan Exchange has noticed a surge in remittances to India as Indian residents take advantage of the exchange rate, which allows them to get more rupees for their dirhams.

“The rupee has broken the psychological levels of 21 rupees against the UAE dirham, which is considered a favourable time to remit money back home,” says Hasan Al Fardan, chief executive of Al Fardan Exchange.

“Flows to India in both the number of transactions and volume has increased substantially. We have seen more than 8 per cent growth in volumes quarter-on-quarter in the first half of 2022 and expect the volume to grow further as we expect the Indian rupee to depreciate even more.”

Many Indians are sending money home “to invest in various growth sectors, such as the property market, bank deposits, and shares”, Mr Al Fardan says.

As expats look to capitalise on the weaker rupee, real estate companies say they are benefitting from the boost in property investments.

“The weakening Indian rupee spurs investment into the country … [as Indian expats] can definitely get more power to consume,” says Shrey Aeren, managing director and country head at Berkshire Hathaway HomeServices Orenda India, a real estate agency.

Over the past year, the company, which sells homes built by some of India's biggest developers, has received a “record number of inquiries, as well as closures from NRIs [non-resident Indians] from all over the world” and the softening rupee is “a significant factor in the opportunity”, Mr Aeren says.

“Because of the weakening rupee, the inflation has really soared and real estate is actually a good hedge against inflation,” he says.

Axis Ecorp, which builds luxury homes in Goa, has seen “a marginal spike in the queries that we have been receiving”, says Aditya Kushwaha, the company’s chief executive and director.

“Due to the current geopolitical situation, there is a sense of uncertainty,” he says. “Therefore, homebuyers are resorting to a more cautious approach.”

Last Wednesday, the Reserve Bank of India (RBI) raised interest rates for the second month in a row in an effort to rein in steep inflation, which will push up the cost of home loans.

Nevertheless, “we feel that if the downwards spiral for rupee continues, it will result in a far greater number of NRIs showing interest in purchasing a holiday home in India”, Mr Kushwaha says.

While Axis Ecorp sources most of its materials for construction from within India, many projects rely on materials from abroad, which are becoming more expensive as the rupee weakens.

“The costs of the raw materials have been spiralling in the past six to eight months,” says Vinit Dungarwal, director at AMs Project Consultants, a construction project management company.

“The rupee hitting record lows will aggravate the situation even further. It will have a far more significant impact on the raw materials that are being imported from outside the country.”

The rupee's movements will also have a significant effect on the country's investment climate.

“A period of currency weakness is accompanied by withdrawal of funds from foreign institutional investors,” Mr Bagla says.

“For bonds, where a large part of the return is from currency movement, a weakening currency could result in exodus from debt foreign institutional investors,” he says.

“Foreign companies expanding in India would have a multi-decade view and would not be affected so much by short-term currency movements.”

However, large companies will be able “to withstand a further 10 per cent to 15 per cent depreciation of the rupee”, according to a report by Moody's Investors Service.

“Most rated companies have protections to limit the effect of currency fluctuations,” says Annalisa Di Chiara, a senior vice president at Moody’s.

“These include natural hedges in the form of revenue and costs denominated in or linked to the US dollar, some US dollar revenue, financial hedges, or a combination of these factors, which help limit the adverse effects on cash flow and leverage,” Ms Di Chiara says.

However, there are heightened credit risks associated with currency volatility, the credit rating agency says.

Given the effects the rupee can have on the economy, the RBI has been intervening in the foreign exchange market to prop up the currency in recent weeks.

“The RBI has been very actively intervening and curtailing the volatility for the rupee,” says Gaurang Somaiya, a forex and bullion analyst at Mumbai-based Motilal Oswal Financial Services.

Mr Somaiya expects the rupee to move towards 78.50 against the US dollar because of rallying oil prices, which are putting pressure on inflation and the trade deficit, and the US Federal Reserve’s interest rate rises.

“The Indian rupee has moved in an orderly fashion and has depreciated by 2.5 per cent against the US dollar during the current financial year [beginning in April] so far — faring much better than many of its emerging market peers,” Shaktikanta Das, governor of the RBI, said on Wednesday.

Meanwhile, Mr Shah is hurrying to mitigate the effects of the rupee's slide on his business and worries about a further weakening in the currency.

“Currently, we are relying on domestic procurement due to prevailing fluctuations in the foreign exchange market,” he says.

“However, it is nearly impossible for us to source every input from the domestic market.”