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Informist, Thursday, Feb. 6, 2025

 

By Anshul Choudhary

 

MUMBAI – A weaker rupee makes for an easy recipe for export companies to boost profits, but the uncertainty around global geopolitics will make it difficult for Indian exporters to capitalise on this fully, at least in the near term, analysts said. Most analysts expect only a limited impact on exporters' earnings from the recent sharp depreciation in the rupee as global trade is expected to be at the behest of policies US President Donald Trump might come up with in the coming months.

 

Trump's resolve to use tariffs against other countries to boost domestic growth has already created turmoil in global markets. Last week, Trump announced tariffs against Mexico and Canada, only to pause their implementation for a month. However, he continued with the tariffs against China, which retaliated with its own tariffs against the US. All of this has raised concerns of a potential trade war, which is likely to hurt emerging market currencies, including the rupee.

 

Apart from the uncertainty around Trump's policies, experts point to other challenges that may make things more complicated for Indian companies. A weaker rupee would increase prices of raw materials being imported by Indian companies, and it will limit expansion in margins even though exporters will get more rupees for each dollar earned.

 

Exporters from sectors such as information technology, pharmaceuticals, textiles, and leather goods makers may see some benefit as the rupee depreciates. However, the higher cost of imports due to a weaker rupee will negatively affect sectors such as oil and gas, which imports crude oil, and fast-moving consumer goods, which imports palm oil. 

 

Indian companies tend to play safe and hedge against currency depreciation, but the relative stability of the rupee for a long period till it started falling recently, has weakened this trend considerably. Even companies that may have hedged as a matter of prudence, have not been very positive about the near-term impact of currency depreciation. Information technology companies that reported their December quarter earnings so far, have refrained from giving any specific guidance about the currency. "Looks like currency will give us some benefit in terms of margin (for Jan-Mar), but we will have to see how the currency progresses through the quarter," Infosys' management said in a post earnings conference call.

 

Analysts said exporters may see some benefit from the depreciation of the rupee only from the September and December quarters of the next financial year. "Exporters can see some limited impact from Q2, or Q3 of FY26, but the impact is likely to be limited...I expect only 25 bps of margin expansion as rupee falls to 87," Vinit Bolinjkar, head of research at Ventura Securities, said while talking about exporters.

 

Several analysts expect the rupee to fall more this year against the dollar as global investors are likely to move to the US in hope of higher bond yields. Interest rates in the US are not expected to come down anytime soon as Trump's policies are likely to lead to inflation in the US, making it difficult for the US Federal Reserve to reduce interest rates. Apart from this, the recent data from the US has continued to show a resilient jobs market, further lowering the prospects of an interest rate cut. Since the start of October, yields on 10-year bonds in the US have consistently stayed above 4%, touching a high of 4.79% in January. On Wednesday, the yield settled at 4.43%.

 

Analysts said despite the recent fall, the rupee is overvalued compared to other emerging market currencies and expect the rupee to fall to 88 per dollar later this year, with some even saying the Indian currency may breach 90 a dollar sometime in the next financial year. Since the start of October, when foreign investors began selling Indian equities, the rupee has touched record lows and has fallen 4.5% against the dollar. Thursday, the Indian unit closed at 87.58 per dollar.

 

"On sharp depreciation in rupee, input cost rises sharply and companies may not be able to pass it (to customers) immediately," Dhananjay Sinha, head of research at Systematix Group, said. Further, this presents a new challenge for Indian companies that are already struggling due to weak demand in the domestic economy.

 

For example, several large FMCG companies are expected to take a hit on volume growth as price hikes effected by them have hurt demand for products. These companies are already running their business at historically peak margins and further increase in prices may hurt growth. Several Indian companies in sectors such as paint, cement, and metals are also struggling to raise prices due to weak domestic demand and cheap imports from China.

 

The sharp depreciation of the rupee creates another problem for overall economic growth in India at a time when high inflation and high interest rates have begun hurting growth. Analysts said the Reserve Bank of India may become wary of bringing down interest rates as this would further weaken the rupee. All eyes now are on RBI, which is scheduled to announce its decision on interest rates Friday.  End

 

US$1 = INR 87.58

 

Edited by Deepshikha Bhardwaj

 

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