AGAINST

BAD NEWS FOR INVESTORS

FALLING

CONTENTSWHY RUPEE HAS BEEN FALLING ?REASONS FOR INVESTING IN

INDIAIMPACT ON FALL OF RUPEE

AGAINST DOLLARWHY THE INDIAN CURRENCY

COULD BE UNDER PRESSURE?WHY DOLLAR IS MOVING U P AND

RUPEE GOING DOWN?CONCLUSION

It is largely on account of the ongoing Euro zone Crisis, which has unnerved investors across the global markets. Greece owes some $400 billion in debt, of which it has to pay $123 billion by 2014. Rating agency Standards and Poor's rates Greece as 'triple C', the lowest in the world, leaving the country struggling to pay its interest costs as interest rates on existing debts rise. As a result, the Euro weakened and the dollar strengthened. "This had a rub-off effect on India, leading to a weak Indian rupee," says Tejas Doshi, VP - Research, Sushil Finance. Apart from the Euro zone worries , the high short-term interest rates in India could also keep the rupee under pressure. This has led to corporate borrowing overseas for the short term. With no easy solution to the Euro Zone debt crisis, experts predict the rupee's fall will continue, at least in the short term.

WHY RUPEE HAS BEEN FALLING?

REASONS FOR INVESTING IN INDIA

• Rupee depreciation has eroded the value of NRI investments in India by nearly 20 per cent in dollar terms. The drop in asset prices (equities, real estate) is over and above the losses due to rupee depreciation.

For instance, your mutual fund investments worth Rs 1,00,000 converted into US dollars would have got $1,896 on January 9, 2012, as against $2,270 in August 1, 2011.

• TAXATION ON NRI DEPOSITS

Though interest earned on NRE and FCNR accounts is tax-free in India, the tax rate for interest income from NRO accounts is 30 per cent. However, NRIs living in countries with which India has a Double Taxation Avoidance Agreement (DTAA) can avail of lower tax rates.

For example, India has a DTA agreement with the US. An NRI based in that country has to pay only 15 per cent on interest earned on NRO deposits.

IMPACT ON FALL OF RUPEE AGAINST

DOLLAR:

POSITIVE IMPACT

NEGATIVE IMPACT

Export-oriented sectors could benefit. Companies in the information technology (IT) and textile sectors should benefit from a weak rupee. Rupee depreciation helps IT companies .

For every 1% depreciation in the rupee, EBIT margins could increase by 0.35-0 .4%. This will help protect margins and give IT companies the much needed cushion against a slowing US economy. The fall in the rupee is one reason for investors to own IT stocks again.

The Indian rupee fell 0.7 per cent against the US dollar at 55.71 on the back of a weak trade data. The Indian rupee has shed close to 25 per cent value over the past one year. It is likely to fall further.

POSITIVE IMPACT

Corporate India is a net borrower of dollar and to that extent a depreciating rupee impacts its balance sheet adversely. Companies with foreign debt on their books are badly impacted. With the rupee depreciating against the dollar, these companies will need more rupees to repay their loans in dollar. This will increase their debt burden and lower their profits. Obviously, investors would do better to stay away from companies with high foreign debt.

Bharti Airtel is one such company that has raised money overseas. Then there are oil marketing companies like HPCL. BPCL and Indian

Oil, which could also be negatively impacted. Since these companies import crude oil, they will end up paying more rupees for the same dollar value of imports.

NEGATIVE IMPACT

WHY THE INDIAN CURRENCY COULD BE UNDER PRESSURE?

1) Exports falling: Worsening trade deficit is bad news for the rupee as the demand for US dollars goes up. India’s trade deficit widened to $ 15.5bn in July 2012. This is significantly higher than $ 10.3bn reported in June 2012.

2) Current account deficit could rise: India’s current account deficit is higher than expected. This occurs when import of goods and services exceed their exports. A higher current account deficit weakens the currency.

3) Dependence on foreign flows: India would need strong foreign capital flows to finance the current account deficit. However, chances of foreign investors allocating more money to India are poor.

4) Fiscal deficit: A fiscal deficit occurs when governments spend more than they earn through taxes and other sources of income. It is important for countries to keep it under control. A large fiscal deficit forces central banks to print more money and stoke inflation. This further hurts the rupee value.

5) Growth slows: India needs a strong growth rate to sustain high spending and boost exports. However, the global outlook for exports is not positive. Most analysts expect India to grow at less than 6 per cent in 2012-13. At the same time, a weak monsoon could push up food prices.

Why dollar is moving up and rupee is going down?

First Reason Dollar is in Demand BRIC countries

like India, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing. They are suffering huge losses in their country. So to recover losses, they are pulling out their investments from India. Due to this pulling out of investment by these big companies from India, demand of dollar is raising up and rupee is depreciating.

Commodity prices are crashing at international level. Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand is increasing against the rupee. This has not happened yet due to lack of confidence in all kind of markets. Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby decreasing demand for rupee.

Second Reason

CONCLUSION

The value of the rupee in terms of dollars will depend over time on the erosion of its value in terms of purchasing power internally. If inflation has been at say, 7 percent, the rupee will have to fall to that extent unless the importing countries are themselves victims of inflation. That is not the case. Hence, the rupee has fallen the most compared to other currencies because we had nearly the highest inflation. Eventually, the rupee will stabilize, barring short-term disturbances, after correcting the loss in its domestic purchasing power. The rupee will not go back to 45 to the dollar; at best it will stabilize at 51-52.

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