Impact of Indian Rupee Depreciation on Different Sensitive Industries

Monday, October 8, 2018
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Indian economy is docked at an interesting juncture. Despite GDP gaining more flesh with a consistent growth over the recent quarters – to the tune of 8.2 percent in the second quarter of 2018, the rupee has depreciated by around nine percent from the beginning of this calendar year and is currently trading alarmingly at 73.55 per dollar. Let’s take a walk through the corridors of some of the depreciation-sensitive industries.

IT Export: A Game of Balance

According to Nasscom, the Indian IT-BPM industry is highly anticipated to double its worth by 2025 to cross $350 billion mark. The exports expect a growth of 7-8 per cent (excluding exchange rate fluctuations) in this period. Prima facie, IT export business may look like it’s poised to channel the falling rupee into its suitcase. But is that really the case?

Lend your ears to Asoke K. Laha, Founder, President & CEO InterraIT Inc. and Director InterraIT India. He echoes, “Theoretically, it (depreciating rupee) can increase the receivables for the IT exporters since the rupee receivables would go up at least by 14 percent. In addition, close to 60 percent of India’s IT export services are projected towards the U.S.; this way, the rupee receivables will be more, unless there is no renegotiation between the parties on the contract”. He continues, “It is a common practice in businesses to renegotiate a deal if one party feels that the other has enriched by some external reasons”.

While these negotiations put things in balance in the SME sector, the top layer of IT companies in India catering to the developed markets like the US and EU with more than 90 percent exposure, gets stuck at a different set of hurdles. Laha opines, “It’s well-known that these companies are on overdrive to recruit local staffs for manning operations to comply with the regulations set out recently by the host countries. In effect, these companies do not save much from rupee fall since they have to incur a good chunk of their income as salaries and rentals abroad”.

Putting it in a nutshell, though depreciating rupee might prima facie look like a boon season in the making for IT export, it’s just an immediate short term phenomenon. Anything other than a stable currency is an economic mirage in the IT export realm.

Tourism: The Potential to Become a Blessing in Disguise

The depreciation of Indian rupee can be a blessing in disguise for the incredible India’s ever growing Tourism sector. The foreign travellers are already choosing locales within India to explore very own Incredible India and its splendid festive beauty! The foreign tourist arrival in India stood at 10.177 million in the last calendar year and has already reached 2.12 million in 2018 (up to February). The incoming is expected to accelerate at around 7.1 percent CAGR till 2025.

“Typically, currency rates do not have a major impact on international leisure travel, as most of the trips & itineraries are planned in advance, so they are not largely influenced by the daily variations in currency rates. However, travellers may consider opting for South East Asia instead of Europe or US. So, the holiday plans remain unaffected though the choice of destination may change,” opines Rakshit Desai, Managing Director, FCM Travel Solutions - Indian Subsidiary of Flight Centre Travel Group, Australia.

On the other hand, business tourism is well directed and has the potential to become a more lucrative segment. Rakshit adds, “Business Travel, on the other hand, may not be as affected as it tends to be non-negotiable for corporates. However, the travel budget/spends during this phase may see a multi-fold increase”. Quite clearly, tourism in India is a high bet despite the falling rupee.

Real Estate: Awaiting a Christmas of NRI-Investment

While many of industry corridors are filled with this silence, the real estate industry is set to have a Christmas of foreign NRI investments. The real estate developers in fact are as excited as the aspirant investors.  Manju Yagnik, the Vice Chairperson of Mumbai-based Nahar Group opines, “The depreciating rupee has bounced back the interest of NRIs to invest in their homeland over the past few months. Alongside fluctuation in rupee against US dollar, introduction of timely reforms in the sector have made transaction dealings more transparent which has enhanced the confidence of investors including NRIs”.

As per industry reports, the real estate industry is estimated at about Rs.3 lakh crore annually, and approximately 7-8 percent of inventory is being bought by NRIs each year. This amounts to approximately Rs.21,000-30,000 crore of annual purchases. With the current trend in the market witnessing enquiries & increasing purchases, it is estimated that investments from NRIs will rise to about 10-12 percent. This will give a significant boost to the real estate sector in India.

A stable economy takes a strong currency above all the short term benefits. China lifting the deliberate depreciation of Yuan is an ideal example. The union government however looks positive. In a recent statement, Economic Affairs Secretary Subhash Chandra Garg had said that Indian economy has completed its recovery process and will exceed 7.5 percent growth rate in fiscal 2018-19. He also shared the hope that the country is well poised to meet its fiscal deficit target of 3.3 percent and said both oil price hike and rupee depreciation are temporary.

Quite clearly, the future has to divulge the financial story on its own!  

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