INR Depreciation against the USD

The Indian rupee has seen a dramatic fall of over 20% in the last 8-9 months against US dollar. While several other emerging market currencies have also been under pressure during this period, INR has been one of the worst performers in its peer group. Such a sharp fall in a small span of time certainly creates challenges for the economy - domestic businesses that have foreign currency borrowing are hurt, foreign investors tend to stay away from the financial markets as INR fall aggravates their losses, domestic liquidity conditions worsen as RBI intervenes to check heightened volatility in INR and risk of imported inflation rises. The key factor that is putting pressure on the currency is the stress in India's balance of payments (BoP), both on current account as well as capital account. India's current account deficit (CAD) has been on a widening trend over the last 4-5 quarters, breaching 4% of GDP in December 2011, which is clearly a zone of high vulnerability.
Indeed, a cross-country comparison shows that over the last few quarters, it is the current account deficit countries that have faced the maximum stress, be it Indian Rupee, Turkish Lira, South African Rand or Brazilian Real. High crude oil prices and rising gold and silver imports are the prime reasons for such a sharp widening in CAD. Notably, gold imports have reached 11.5 per cent of total imports in FY12 compared to 9 per cent in FY11, possibly reflecting higher demand of gold as a hedge against inflation and general expectations of rising gold prices. Let us now look at it from a more close angle: 
(i) In this regard, passing-on higher energy prices on to the consumers is a crucial step which the government did by giving a steep increase in the price of Petrol. It will help reduce fiscal deficit (and hence improve government savings) and can also lead to downward adjustment in energy demand, once retail prices are hiked thereby reducing the energy imports.
(ii) According to Moody's, the depreciation of INR against the USD will not hit government rating because foreign currency debt comprises only 7% of its total debt and 5% of gross domestic product. "Most of it is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. Therefore, the direct effect of depreciation on the government's own debt repayment capacity is limited," Moody's said.

(iii) For Indian exporters, including software outsourcing companies like TCS and Infosys, a weaker rupee could help increase sales because it would make their products and services cheaper. However, many IT companys in India have the concept of Hedging their foreign exchange income. They usually hedge against a particular value and project earnings/profit numbers for the subsequent quarters. So, the profit they make due to this rupee depreciation may not be as stellar as one might expect, but nonetheless, IT Majors are expected to make some gains from the depreciation of INR against the USD.

(iv) Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, tea, chemicals and related products, etc. Since the 1990s, India is the world’s largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. A weak rupee would give them the competitive edge against countries like China. 

(v) Hotels benefit from rupee depreciation as over 60% of revenues in the luxury hotel segment are in foreign currencies. Thus any depreciation of the rupee goes directly to the bottom line, as none of the costs are directly linked to the exchange rate. Therefore, the shares of Country Club Ltd, Indian Hotels, etc. could be benefited. 
(vi) Besides, for those people who are planning a visit to India now, have a lot to cheer about as they will get good bargain for their home country currencies now. This translates to having more spending power in India as compared to other favourite destinations like Singapore and Thailand. Commodity analysts also say that a weaker rupee could also lead to a rise in gold prices, as investors tend to shift their focus away from riskier assets like stocks to the bullion market in such scenarios.

Therefore, the moot point is that, a weaker rupee at a time of falling oil prices would reduce concerns about inflation, while the ensuing boost in exports could reduce India's trade deficit. That in turn would relieve pressures on the current account deficit and the balance of payments. "The depreciation of the rupee is part of the solution, not part of the problem," said Rajeev Malik, a senior economist at CLSA in Singapore, a day before the rupee fell to a record low.

J. Moses Harding, head of asset liability at IndusInd Bank added the RBI may not need to defend the currency too aggressively in light of the steep decline in oil prices.
"It may not be a bad idea for RBI to allow rupee to find its own floor instead of defending rupee at the expense of money market, which is already under structural liquidity strain," he said.
In nutshell, near-term movements of INR will continue to be shaped by the capital flows situation, which in turn will be influenced by developments in Europe.
However, at the domestic level, the government needs to urgently act towards reducing CAD by cutting down its fiscal deficit and improving India's overall investment climate so as to attract foreign capital flows.
Now, whether the USD remains the king or not, is no longer a million dollar question, but a million Rupee question!