MUMBAI: The rupee shows no signs of clambering out of the depths, with the unit falling beyond 70 to a dollar for two consecutive days after the Turkish lira late last week signaled pain for the broader Emerging Markets in a precipitous decline symptomatic of its deeper – but likely localized - economic malaise.
The rupee touched a new low at 70.40 to a dollar Thursday as traders continued to short-sell the currency over concerns about India’s worsening trade data. The lira’s temporary revival also failed to buttress the rupee, although its decline favours exporters.
“The rupee’s down-move continues, and the latest recovery in the lira has left little impact,” said Param Sharma, director at NSP Treasury Risk Management. “Domestic trade data weighed on the local unit that is already bruised.”
Since Tuesday, the lira gained about 10% against the dollar, after having lost more than 40% this year, with the bulk of the declines registered just last week. Wednesday was a public holiday in India.
India’s trade deficit, or the excess of overseas spending over revenues, widened the most in five years. Trade deficit expanded to $18b in July, from $16.6b in June, partly due to the higher oil import bill.
“This year’s rupee weakness is positive for our balance of trade,” said Ananth Narayan, professor at SP Jain Institute of Management and Research (SPJIMR). “At a time when our current account has been under stress, the rupee depreciation should help exporters.”
To be sure, the volatility can affect decision-making. “While it is tempting to punt in currency markets, companies are also concerned about volatility of their currency costs and revenues,” Narayan said.
The rupee fell 0.38% Thursday to close at 70.16/$, its record low closing level, recouping some of its early losses on suspected central bank intervention.
Exporters with a lower share of imports are likely to gain.
“Net exporters will obviously gain from the rupee's fall as they receive more rupees against their overseas receivables,” said MS Gopikrishnan, Standard Chartered Bank. “The rupee slide will also help maintain global export competitiveness for Indian companies.”
If a steel maker exports finished products, it will receive more overseas payments, but it is to be seen how much it imports to manufacture such products. If the import component is less than a quarter, the exporter will improve its profitability.
India's merchandise exports increased 14.3% to US$ 25.77 billion in July over a year ago.
“Exporters should maintain their hedges as per policy," said Abhishek Goenka, CEO of Mumbai-based advisory IFA Global. "Instead of vanilla forwards contracts, exporters should enter into range forward option structures and pay a premium. Thus, they can realise more than forward premiums in case of an excessive depreciation.”
Most exporters are covered anywhere between 30 and 80% of their yearly turnovers to reduce their interest cost and earn carry. Many exporters find themselves over-covered now, while importers are under-covered.
“That itself is the principal reason behind the current market nervousness,” said Narayan.
Source: economictimes.indiatimes.com